Nigeria shifts to floating exchange rate: What does this mean for FOREX investors?

One of Africa’s largest economies, Nigeria, has struggled with currency stability and foreign exchange rates. Over the past year, the government employed several policies to oversee exchange rates, which led to the development of multiple exchange regimes.

But on June 14, 2023, the Central Bank of Nigeria (CBN) announced the immediate unification of the country’s exchange rate on the Nigerian naira. This change included re-introducing the “Willing Buyer, Willing Seller” model at the Import and Export window at the foreign exchange market. Given these many changes to foreign exchange (forex), it’s essential for traders to explore the shift to a floating exchange rate and what this means for them to maximise their profits into the future.

Change in government capacity
One of the biggest advantages of the unification is the increase of foreign exchange income to the government, shifting from the artificial rate of N435 to the dollar to higher rates determined by the market. With more favourable returns, the Nigerian government has a greater capacity to fulfil its promises— enhancing the capacity of the manufacturing sector as well as boosting startups and entrepreneurship for greater job opportunities locally.

On a larger scale, the Centre for the Promotion of Private Enterprise provided their support and insight into how forex can boost the local economy, “The CPPE also expects the new policy to deepen the autonomous foreign exchange market through the liberalisation of inflows from Export Proceeds, Diaspora Remittances, Multinational oil companies, diplomatic missions, etc.,” the statement concluded.

Increase in foreign investments
Initially, the country lost out on Foreign Direct Investments as it was impossible for investors to repatriate their profits. However, through the floating currency, investors could now repatriate their profits. A large rebound is expected over the coming weeks due to the low share prices of the Nigerian market.

With the shift to floating exchange rates and an influx of foreign investment, experts highlight that the Naira will face increased exchange volatility. It is expected that people who trade forex may do so at wider spreads until liquidity levels are restored. Given potential gaps, it’s crucial to stay alert to important economic news as Exness and other top brokerages tend to cap leverage at 1:200 for new positions. This can limit how local brokers can use their available margin depending on market conditions.

Rise in debt and costs of goods and services
However, with the increase in governmental revenue, there is also a significant rise in the existing government and external debt. Nigeria’s debt in naira is estimated to be N90 trillion today, compared to N12 trillion before the unification, whereas external debt will increase by $42 billion. This has caused the ratio of debt to Gross Domestic Product to increase to 5%.

In addition, Nigeria is mainly dependent on imports to support its economy, so the overall costs of any goods and services imported will become more expensive. Several experts predict this could spark an inflation spiral, especially for goods like refined petroleum products.

To successfully benefit from this unification, the government must actively participate in effective policy action and careful monetary management. At the same time, investors can take advantage of the low liquidity to not only support the growing economy but also repatriate earlier investments. For local forex brokers, it’s important to seize these opportunities in the Nigerian economy to make the most of equity prices.