History will be made today when commercial banks set the first exchange rate of the naira versus the dollar as our currency floats freely. Reuters had late Friday reported that CBN officials told bank chief executives that lenders would set the first naira rate to the dollar based on demand without CBN intervention.
It is worthy to note though, that the CBN did not commit itself to clearing up a backlog of hard currency estimated at around $4 billion, but will intervene if needed. Bid-offer spreads for trading would be set at ₦1, and banks will be required to publish their buy and sell rates on a daily basis. The CBN will the evaluate performance of the new regime in December.
Last Friday, SBM Intelligence sent a note to some of our clients. A summary of the note is now publicly available.
If all goes well, we believe that for a start, the Naira is likely to weaken further in the short term since it will no longer be shored up by the CBN. The inflation rate will likely spike as the value of money reduces.
Should this occur, the Monetary Policy Committee may see the need to increase the monetary policy rate (the rate at which the CBN transacts with banks), leading to an increase in the cost of borrowing money in the economy and resulting in a drop in credit.
Such an action will have an adverse effect on the real sector as businesses will suffer a drop in profit margins and individual borrowers will see more money taken out of their pockets.
In the medium to long term however, we expect that as people get used to the new FX market, inflation rates will start to drop and the real benefits of the policy will take effect. Just as reduction of petrol subsidies eliminated diversion of products and savings for government, so will this policy eliminate many sharp practices.
We are optimistic that the days where the majority of Nigerians suffer for the benefit of a few as a result of monetary policy, are nearing their end.