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In recent months, the foreign exchange (forex) trading unification policy implemented by President Bola Ahmed Tinubu has been the talk of the town. Around two weeks after his inauguration in late May 2023, president Tinubu put this policy into effect, receiving different reactions from various sectors that engage in forex—like businesses, investors, and everyday Nigerian citizens.
Since this is a newly implemented policy, such sectors must remain updated with any changes or effects this unification may entail. This is especially true in the case of investors. Certain news events affect factors in forex trading, like margin requirements. For instance, multiple news releases about the unification policy in a short period can raise or lower the margin needed to keep a position. This is why, aside from consulting economic calendars, those involved in forex trading may want to keep themselves updated on Tinubu’s forex unification policy. By doing so, they can prepare to adjust their trades or change their trading decisions in light of recent events.
In line with this, here’s a breakdown of the latest updates on Nigeria’s forex trading unification policy:
The conceptualisation of the forex trading unification policy
The first thing people must know about the forex trading unification policy is the reason why it was enacted in the first place. Simply put, this policy was created to stabilise the local currency and woo investors in the country. Nigeria’s foreign exchange rate formerly adhered to a multiple exchange rate regime, including the Nigerian Autonomous Foreign Exchange (NAFEX) and Interbank Exchange rates.
The NAFEX rate was set by the Central Bank of Nigeria. Before the unification policy was proposed, it was used for government transactions and official foreign reserves. On the other hand, the Interbank Exchange Rate was used by commercial banks when trading foreign currencies among themselves.
However, these two exchange rates would often differ from one another. These differences distorted the value of the Nigerian naira (NGN), paving the way for speculative activities and arbitrage that led to an inefficient allocation of resources in the country. To mitigate these effects, the Central Bank of Nigeria announced in mid-June that it would unify the exchange rates to create a level playing field for all market participants.
What this means for different stakeholders in Nigeria?
Though Tinubu’s forex trading unification policy has been implemented for almost a month at the time of writing, different sectors can already expect the following effects:
Businesses
So far, businesses have responded positively to the forex trading unification policy. Some financial professionals have expressed that the unification will address economic challenges in the country, such as the US dollar (USD) shortage. This scarcity previously affected local manufacturers importing raw materials, as well as investors and companies that wished to do business abroad and needed dollars to aid their operations.
As a result, a parallel market opened up that enabled people to access dollars at NGN750 per USD—a 62% premium that not all businesses could afford. Some companies also tried to get dollars using the official rate set by the government—NGN463 per USD—although they faced many hindrances in doing so. Businesses had to book an appointment, complete lots of paperwork, and wait for a final decision for weeks or months before getting foreign currency.
With the unification policy creating a uniform exchange rate, businesses no longer struggle to access foreign currencies. They don’t need to pay premiums or set up appointments and instead benefit from the country’s previous shortage of foreign currencies like the USD.
Individuals
On the other hand, ordinary Nigerians may notice that goods and services are currently priced at the parallel market rate mentioned above. There’s a possibility that these prices will go down as foreign currencies become more accessible, although there’s no guarantee this will occur. Since market forces will now determine the exchange rate rather than the central bank, the price of imported goods can also get more expensive—mainly since the country relies on imports.
Some residents have also expressed concern over the new policy. Banker Samuel Badejo shared with Africa News how he perceives this new policy positively. Still, he remains cautious about the results, as forex unification was enacted within President Tinubu’s first 100 days in office. Meanwhile, travel consultant Prudent Odeh believes the policy will create a better Nigeria, prompting Tinubu to investigate financial activities and eliminate actors not competent enough to implement market policies in the country. In fact, Tinubu has already started doing so with the suspension of officials like former central bank governor Godwin Emefiele in early June. Emefiele had recently pushed new currency notes into circulation, causing a severe scarcity of cash with which Nigerians could pay for daily necessities.
How the unification policy will affect Nigeria’s economy
Apart from affecting those involved in forex, this new financial policy will affect the country’s economy. This forex regime is already on its way to temporarily changing the pump price of petroleum. The country imports petroleum, so the exchange rate at which Nigerian National Petroleum Company Limited purchases it will determine how much fuel prices will be. Still, residents shouldn’t worry about shocking prices, as the government still has a role in moderating them. This will create stability and give people time to adapt to any price changes resulting from the forex trading unification policy.
Aside from this, the policy is also working to remove uncertainty from Nigeria’s forex market. Aside from giving local forex traders better opportunities to place orders, the policy is also set to attract more investors to Nigeria. The unified exchange rate will increase investors’ confidence and reduce their doubts regarding financial decisions in the country, prompting them to do business here. This will create more jobs and diversify the economy by introducing foreign products and services. This benefit is starting to bear fruit, with forex inflow in the country rising to USD1.41 billion in July 2023 as compared to USD1.14 billion in May.
Nigeria’s move to unify foreign exchange rates brings lots of economic benefits, including attracting more foreign investors. In the long run, this policy will most likely benefit more of the country’s operations. For similar articles, check out our business category here at The Sun.
