Floating the naira may lead to a spike in exchange rates, but the interplay of demand and supply would force this to settle at an equilibrium.
…managing exchange rates leads to some unintended consequences, one of which is the implied subsidy on foreign exchange from the Central Bank of Nigeria . There is no debate on the fact that whenever and wherever subsidies exist, distortions and irrational behaviour jump into the fray… If the exchange rate could move from N200 to N520 in six years, it can also move beyond N1,000 if we continue with our current form of economic behaviour.
From recent memory, Nigeria has tried several currency management policies, ranging from the second-tier foreign exchange management policy of 1986, to the current one of a managed float. In all, there has not been any policy deliberately targeted at making the naira convertible, knowing that if the currency becomes convertible, oil will be negotiated and paid for in naira.
Nigeria’s major supply of foreign exchange comes from the daily proceeds of crude oil sales, which accounts for about 85 per cent of the country’s dollar receipts. The next major source is home remittances from Nigerians abroad. In 2011, Nigeria’s total receipts from oil stood at $68.4 billon, which has been dropping since then, to $58 billion in 2013, $55.5 billion in 2014, and to $32.6 billion in 2018. There was a slight recovery to $34.
A closer look at the data of Nigeria’s home remittance clearly shows that the key driver is political stability and security in the country. Nigeria can easily double its home remittances up to $50 billion annually if the government can guarantee the safety and security of lives and properties of the citizenry. Nigerians typically feel more comfortable to remit money home when the country is stable and there is peace, equity and justice.
Changes in circumstances would also affect receipts, for instance remittances to build a house will cease when such a house is completed and remittances for the upkeep of parents and siblings would stop when the parents are no more or when siblings become independent. Another important point is that the longer immigrants stay away from Nigeria, the more their links with the motherland attenuate and eventually, we may get to a generation that has little or no link with Nigeria.
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