On June 14th, 2023, the Central Bank of Nigeria (CBN) made an announcement that would send shockwaves throughout the Nigerian economy. In a press release, they announced the abolishment of segmentation in the foreign exchange market and the collapse of all windows into the Investors and Exporters (I&E) window. This announcement, in simple terms, reintroduced the “willing buyer, willing seller” model at the I&E window, where the exchange rate would now be determined by market forces—supply and demand.

To many, this move came as an uncertain shocker—one that still has its ripple effects being felt to this day. 

You see, for years, Nigeria had maintained a system of multiple exchange rates, with one official rate and another, more volatile, black-market rate. This new policy was meant to bring all that to an end, signaling the CBN’s decision to float the naira. But was this a stroke of genius, or a move destined to sink the economy deeper into crisis?

In retrospect, was floating the naira a good idea?

Nigeria’s Exchange Rate Policies

To understand why Nigeria took this dramatic step in 2023, we need to rewind the clock.

When Nigeria switched to the naira from pounds in 1973, it also transitioned from a fixed exchange rate system to a managed float regime. This was a hybrid system that mixed elements of both fixed and floating rates, allowing the government to apply either as necessary. The change was instituted to create a balance between maintaining stability for the exchange rates and allowing economic realities and market forces to influence them. Over time, Nigeria was able to adjust itself to the volatile global economic climate and effectively handle its foreign exchange reserves.

The 1970s saw a global oil boom, and as a nation rich in oil reserves, Nigeria benefited immensely. The price of oil soared, and the country experienced a substantial increase in revenue from oil exports. However, this blessing also created an overdependence on oil, neglecting other sectors of the economy. For instance, agricultural production of cocoa, rubber, cotton, and groundnut fell by 42%, 29%, 65%, and 64%, respectively, between 1970 and 1985.

When oil prices took a downturn in the 80s, the country’s over-reliance on oil revenue became its Achilles’ heel. The neglect of other revenue sources led to a series of fiscal deficits and foreign exchange shortages. It became clear that Nigeria needed to diversify its economy.

In response, the government of Ibrahim Babangida, in collaboration with the World Bank and the IMF, introduced the Structural Adjustment Program (SAP) in 1986. Under SAP, Nigeria experimented with various floating exchange rate regimes, such as the Second-Tier Foreign Exchange Market, the Dutch Auction System, and the Deregulated Exchange Rate System. These policies were implemented off and on at different times between the 1980s and the late 2010s.

By 2017, Nigeria had moved towards a fixed exchange rate system. However, a parallel market emerged, creating a dual-rate system—one for the official CBN rate and another for the black-market rate. The official rate was used for essential transactions, such as payments for foreign debt, government business, and vital imports like fuel. The black-market rate, on the other hand, was used for more personal and small-scale transactions, often reflecting market forces more accurately than the official rate.

In response, the government initiated measures to consolidate its exchange rate system by reducing the disparity between the official and parallel prices. This was done through the creation of the Investors and Exporters FX window, which provided rates that struck a balance between the black market and the official rate. 

Despite these efforts, maintaining different rates continued to create problems, such as market imbalances, opportunities for arbitrage, and corruption. To address these challenges, Nigeria implemented reforms like restricting the bureaux de change from buying foreign exchange as agents of the CBN and reaffirming the illegality of the parallel market.

Ultimately, the need to eliminate these dual rates and save the plummeting naira led to the CBN’s bold decision on June 14th, 2023.

Why Float the Naira?

As we’ve already established, the decision to float the naira wasn’t pulled out of thin air. It was the result of years of pressure from both domestic economic realities and international institutions like the World Bank and the International Monetary Fund (IMF), both of which had been pushing Nigeria to unify its exchange rate system.

The logic behind the float is simple: by allowing the naira to be priced based on market forces, Nigeria could eliminate the multiple exchange rate windows that had created arbitrage opportunities, rent-seeking, and general chaos. The official exchange rate was often so far below the black-market rate that savvy traders could manipulate the system to their benefit, buying dollars at the official rate and selling them at the black-market rate. It was a system rife with inefficiencies and corruption.

By floating the naira, the CBN hoped to:

• Close the gap between the official and parallel exchange rates.

• Attract foreign investment by creating a transparent and unified market.

• Boost exports by allowing the naira to depreciate, making Nigerian goods cheaper for foreign buyers.

• Restore trust in the foreign exchange system, which had been eroded by years of manipulation and speculation.

All of this sounds pretty good on paper, right? But in reality, things took a more different turn.

The Immediate Fallout

The moment the float was announced, the naira did what everyone feared it would: it tanked. Within the first week, the naira plunged by nearly 37%, falling from around ₦400 to ₦750 per dollar. 

Fast forward to the time of this writing, October 2024, the exchange rate now sits around ₦1,643 to $1. That’s a pretty steep fall for any currency, let alone one that’s the lifeblood of an import-dependent economy like Nigeria.

For context, Nigeria imports a significant portion of its essential goods—everything from fuel to food to medicine. A weaker naira means these imports become significantly more expensive. As a result, inflation skyrocketed. 

By January 2024, inflation had hit 29.9%, and the cost of living for the average Nigerian was spiraling out of control. Businesses that relied on imported goods saw their costs skyrocket, and many were forced to shut their doors.

So, in the short term, the answer to whether floating the naira was a good idea seems to be a resounding “no.” But let’s not close the book just yet. It’s important to remember that floating a currency is a long-term play. The initial pain is often sharp, but the real question is whether it will pay off in the future.

The Case for a Floating Naira

While the initial fallout has been brutal, there are reasons to believe that floating the naira could, in the long run, be a good idea. Here’s why:

1. It Levels the Playing Field

Before the float, Nigeria had a dual-exchange rate system—one rate for big businesses and government transactions, and another rate (the black-market rate) for everyone else. This system created distortions in the market, encouraged corruption, and made it incredibly difficult for businesses to plan for the future.

By floating the naira, the CBN eliminated these multiple rates, creating a single, transparent rate. In theory, this should make it easier for businesses to operate and for investors to trust the system. It also removes the arbitrage opportunities that enriched a few at the expense of the many.

2. It Could Boost Exports

A weaker naira could make Nigerian goods more competitive on the global market. After all, if the naira is worth a little less, that would translate to Nigerian products being cheaper for foreigners to buy. This, in theory, could boost exports and help diversify the economy away from its dependence on oil. Countries that have successfully floated their currencies—like Egypt and Argentina—have often seen their export sectors get a major shot in the arm. If Nigeria can follow a similar path, the float could help the country develop a more balanced and resilient economy.

3. It’s a Long-Term Play

Floating the naira was never meant to be a quick fix. It’s a long-term solution to a long-standing problem. In the short term, the naira was always going to lose value. But over time, as the market stabilizes, the hope is that the currency will find its true value and that the economy will adjust to this new reality.

The IMF and World Bank both argued that Nigeria couldn’t continue with its old exchange rate system. It was like trying to plug a leaky boat with a towel: you might stop a little water from getting in, but eventually, the whole thing will sink. Floating the naira, painful as it is, was an attempt to fix the boat.

The Case Against the Float

Of course, not everyone is convinced that floating the naira was the right move. The critics have some compelling arguments, too:

1. Inflation Is Crushing the Poor

The most immediate consequence of the float has been soaring inflation. For a country where poverty rates are already high, this has been devastating. The price of essential goods like food, fuel, and medicine has skyrocketed, and many Nigerians are struggling to make ends meet. Critics argue that the CBN should have put in place safety nets before floating the currency—like subsidies or welfare programs to protect the most vulnerable citizens from the shock of rising prices.

2. Foreign Debt Just Got More Expensive

Nigeria’s foreign debt is denominated in dollars, not naira. So, as the naira loses value, the cost of servicing that debt goes up. This means the government will have to spend more naira to pay off the same amount of dollar-denominated debt, putting even more pressure on the country’s finances.

3. Investor Confidence Is Shaky

For a float to work, you need investors to feel confident in your economy. But the volatility of the naira has made many investors nervous. If foreign investors don’t believe that the naira will stabilize, they’re unlikely to put money into the country. And without foreign investment, it’s hard to see how the economy will recover from the current downturn.

In the End, Was It Worth It?

At this point, it’s hard to say for sure. The immediate effects of floating the naira have been mostly negative: inflation is up, the currency is down, and the cost of living is higher than ever. But this was always going to be the case.  It’s like taking medicine with uncomfortable side effects—you endure the pain in the hope that you’ll be healthier in the long-run.

For the float to be considered a success, the Nigerian government will need to:

• Implement effective monetary policies to control inflation.

• Encourage exports to take advantage of the weaker naira.

• Attract foreign investment by restoring confidence in the economy.

• Diversify the economy to reduce dependence on imports and foreign exchange reserves.

In the long run, if these steps are taken, the float could help stabilize the economy and set it on a path to growth. But if the government fails to act swiftly and wisely, the float could end up being just another chapter in Nigeria’s long history of economic mismanagement.

So, was floating the naira a good idea? Only time will tell. But one thing’s for sure: it was a bold move—and sometimes, bold moves are exactly what’s needed to bring about real change.

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