Assessment of nigeria's new foreign exchange policy

Nigeria's new foreign exchange policy, introduced in 2020, aims to address the country's foreign exchange challenges and promote economic growth. The policy has several key components, including:

  1. Unification of Exchange Rates: The policy unifies the official and parallel market exchange rates, eliminating the multiple exchange rates that existed previously. This is expected to reduce the premium on the parallel market and promote a more stable exchange rate.
  2. Flexible Exchange Rate Regime: The policy adopts a flexible exchange rate regime, allowing the naira to float freely in the foreign exchange market. This is expected to promote a more market-determined exchange rate and reduce the need for frequent interventions by the Central Bank of Nigeria (CBN).
  3. Increased Foreign Exchange Allocation: The policy increases the allocation of foreign exchange to critical sectors such as agriculture, manufacturing, and small and medium-sized enterprises (SMEs). This is expected to promote economic growth and job creation.
  4. Improved Foreign Exchange Management: The policy introduces improved foreign exchange management practices, including the use of electronic foreign exchange (FX) platforms and the introduction of a foreign exchange management committee.

Assessment of the policy:

Positive Impacts:

  1. Stabilization of Exchange Rate: The policy has helped to stabilize the exchange rate, reducing the volatility that existed previously.
  2. Increased Foreign Exchange Availability: The policy has increased the availability of foreign exchange, particularly for critical sectors such as agriculture and manufacturing.
  3. Promotion of Economic Growth: The policy is expected to promote economic growth by increasing the availability of foreign exchange and promoting investment in key sectors.
  4. Improved Foreign Exchange Management: The policy has introduced improved foreign exchange management practices, which are expected to reduce the risk of foreign exchange losses and improve the overall efficiency of foreign exchange transactions.

Negative Impacts:

  1. Inflationary Pressures: The policy has led to an increase in import prices, which has put upward pressure on inflation.
  2. Depreciation of Naira: The policy has led to a depreciation of the naira, which has reduced the purchasing power of Nigerians.
  3. Increased Cost of Living: The policy has led to an increase in the cost of living, particularly for low-income households.
  4. Uncertainty and Insecurity: The policy has created uncertainty and insecurity in the foreign exchange market, which has discouraged investment and hindered economic growth.

Recommendations:

  1. Monetary Policy: The CBN should maintain a tight monetary policy to reduce inflationary pressures and stabilize the exchange rate.
  2. Fiscal Policy: The government should implement fiscal policies that promote economic growth and reduce the budget deficit.
  3. Investment in Infrastructure: The government should invest in infrastructure development to promote economic growth and reduce the cost of doing business.
  4. Improved Foreign Exchange Management: The CBN should continue to improve foreign exchange management practices to reduce the risk of foreign exchange losses and improve the overall efficiency of foreign exchange transactions.

In conclusion, Nigeria's new foreign exchange policy has both positive and negative impacts. While it has helped to stabilize the exchange rate and increase foreign exchange availability, it has also led to inflationary pressures, depreciation of the naira, and increased cost of living. To mitigate these negative impacts, the CBN and government should implement policies that promote economic growth, reduce inflation, and improve foreign exchange management practices.