For the past few years, the naira has been pegged at 197 or 199 to the US dollar. However, the head of the Central Bank of Nigeria said Wednesday that Nigeria would introduce a flexible exchange rate, starting on June 20.
Previously, Nigerian president Muhammadu Buhari said that he would not let the naira fall in value, which will likely happen with the flexible exchange rate. But Nigeria, whose main export is crude oil, has been suffering from the global plunge in petrol prices. As oil exports brought in less dollars and Nigeria ran out of foreign currency reserves, the economy stagnated. The country imported less, leading to shortages and widespread discontent.
“There’s been long queues, there’s been hoarding and the black market is running rampant,” said Professor Ndubisi Nwokoma, head of the department of economics at the University of Lagos. “The government is responding to an outcry by manufacturers and people who need to transact with the foreign sector.”
Nwokoma thinks this policy is a good idea.
“We need a more realistic exchange rate because, currently, the gap between the official rates and what is paid on the black market is huge,” Nwokoma said. “That isn’t good for the economy”.
According to Bloomberg news network, foreign direct investment in Nigeria also recently fell to its lowest levels since the 2007 and 2008 global financial crisis. Bloomberg also reported that investors were scared by Buhari's previous policies. This change is policy is also hoped to bring in foreign direct investment.
"The government is trying to make institutions, law and code that can guide the economy,” said Femi Saibu, an economics professor at the University of Lagos. “Before, we just saw ‘fire brigade solutions’ the government responding to crisis but not working to improve the system. I think if all these policies are well implemented, the economy will improve in a few months."
However, not all the experts agree that this is the right direction to take. Badayi Sani, a professor in the Department of Economics at Bayero University in Kano, Nigeria, is skeptical about this policy.
"This can only work for countries that have domestic production capacities,” he said. “Nigeria is interdependent. I’m worried that the purchasing power of Nigerians will be eroded. If the naira loses value, it might negatively affect the government’s ability to provide goods and services and critical infrastructure, as well as its policy of diversifying the economy."
The vote is still out on what this fiscal policy change means. The new policy will be implemented on June 20, next week.