Nigeria’s Central Bank: Moving Toward a Managed Float
The Central Bank of Nigeria (CBN) is taking steps to move the country’s foreign exchange (FX) system toward a managed float. This move is part of the CBN’s efforts to reduce the country’s reliance on the US dollar and to promote the use of the Nigerian naira.
Background on Nigeria’s FX System
Nigeria’s FX system has been a source of economic instability for many years. The country has relied heavily on the US dollar, which has caused the naira to depreciate in value. This has led to high inflation and a decrease in the purchasing power of the naira.
In an effort to address this issue, the CBN has implemented a number of measures over the years. These measures have included the introduction of a flexible exchange rate system, the introduction of a foreign exchange market, and the introduction of a managed float.
The Managed Float System
The managed float system is a type of exchange rate system in which the central bank intervenes in the foreign exchange market to influence the value of the currency. The CBN has been gradually moving toward this system since 2018.
Under the managed float system, the CBN will set a target exchange rate and intervene in the market to ensure that the rate remains within a certain range. This will help to reduce volatility in the FX market and ensure that the naira remains stable.
Recent CBN Actions
In June 2023, the CBN announced a number of measures to further move the country’s FX system toward a managed float. These measures include:
- The introduction of a new FX trading platform, which will allow for more efficient and transparent FX trading.
- The introduction of a new FX risk management system, which will help to reduce volatility in the FX market.
- The introduction of a new FX settlement system, which will help to reduce settlement risk.
- The introduction of a new FX hedging system, which will help to reduce FX risk.
Benefits of the Managed Float System
The introduction of a managed float system is expected to bring a number of benefits to the Nigerian economy. These benefits include:
- Reduced volatility in the FX market, which will help to reduce inflation and improve the purchasing power of the naira.
- Increased foreign investment, as investors will be more confident in the stability of the naira.
- Increased access to foreign exchange, as the CBN will be able to intervene in the FX market to ensure that the naira remains stable.
- Increased economic growth, as the improved FX system will help to attract more foreign investment.
Conclusion
The Central Bank of Nigeria is taking steps to move the country’s foreign exchange system toward a managed float. This move is expected to bring a number of benefits to the Nigerian economy, including reduced volatility in the FX market, increased foreign investment, increased access to foreign exchange, and increased economic growth.