What free-floating forex means for dollar-trading platforms and Nigerian Fintechs

If reports from major news outlets are anything to go by, Nigeria’s apex bank, the Central Bank of Nigeria (CBN), has given the go-ahead for commercial banks to trade the naira against the U.S dollar based on a free market.

Bloomberg reports that the Naira, the currency of Africa’s biggest economy dropped 21% to 600 per dollar as of 1:20 p.m. in London, the biggest decline since 2016 to the weakest on record, according to data it compiled.

The Nigerian naira plunged the most in seven years on Wednesday as officials were said to be discussing letting it trade more freely against the dollar.

The discussion was centred on letting the currency trade more freely was ongoing at the central bank, a senior banking official told Bloomberg earlier on Wednesday, asking not to be named because the deliberations were private. Directives on the currency could be issued later today or latest tomorrow, the person said.

Recall that some weeks ago, there were speculations that the Central Bank of Nigeria (CBN) was set to devalue the Nation’s currency- to N631 to the dollar from N461.6 it sold at the Importers and Exporters (I&E) window the previous day.

The speculation also followed the declaration and promise of President Bola Tinubu to unify the multiple exchange rate in the market. And although this might not be an outright devaluation of the nation’s currency, allowing free-floating forex is seemingly a fruit of the same tree, an obvious depreciation of the naira. While the former is a result of policy, the latter is ascribed to market forces of demand and supply.

Although the CBN is yet to issue an official statement concerning this, it is expected that a statement by Nigeria’s apex bank will be released later in the day to confirm the new forex strategy.

Read also: What will a Naira devaluation mean for fintechs in Nigeria?

Demand and Supply: Let the market decide

Local banks are already being told that going forward, the naira’s exchange rate against the dollar will be determined through supply and demand rather than by the central bank, another senior banking official said. The bankers said they were expecting a strong depreciation of the naira at the official spot window.

Basically, what this means is that every seller, including the CBN is allowed to set their own rate, primarily determined by what the market offers. This completely eliminates the need for a parallel or black market.

Currently, the naira trades at N600/$ on the Bloomberg terminal as the CBN frees the FX market.

What this means for Fintechs and dollar-trading platforms

The effects of the free-floating forex on fintech or dollar-trading platforms can be seen from various aspects. First of all, the currency may become so volatile that the exchange rate may become unpredictable for Fintechs to determine their rates. So, for the first few days, there might be some lags in rate changes for these fintechs.

One solution to the unpredictability of the FX market and the rate at which to do business is to align to the CBN trading rate or work with commercial banks they partner with to determine their rate. So for example, if a particular fintech is partnering with XYZ bank, the rate set by XYZ bank would be the rate of the fintech.

Yet, depending on the rate they choose to use, fintech companies that deal with remittances may face a dilemma that could result in either a gain or a loss. Nonetheless, these platforms might establish a working rate based on the range in which they anticipate market volatility in order to be on the safe side.

Fintechs generally need to stay current to prevent losses, and individuals may decide to prevent losses by keeping more of their money in cash given that the market is expected to be volatile in the upcoming days and weeks.

Free-floating forex may indicate that the naira begins to appreciate against the dollar since, if recent weeks and months are any indications, it had stabilised about N740 to N760 to the dollar. This can imply that dollar savings are no longer recommended. But that remains to be seen in the long term.

What this means for the Naira and Nigerians

Contrary and in relation to the fixed foreign exchange policy of the CBN, free-floating forex is a step in the right direction given that the Naira’s value is currently over-stated, and a continuous tightening of the forex does no good to the economy in the first place.

With free-floating forex, everybody is allowed to source and sell dollars at a rate that is favourable to them, based on what the market is offering. So the first benefit is that there are many sellers and many buyers, a free entry and exit. Everybody can sell, and everybody can buy or chose not to buy at your rate.

So, for example, if a seller is selling above a range that is seen to be too high in the market, buyers can choose not to buy and go for a favourable price. It’s just like going to the market to buy a commodity like rice, with many sellers, you can negotiate.

If the demand for the naira becomes so high, then there would be some appreciation for the naira, and it will gain against the dollar. However, if the demand for the dollar is higher, then the naira is sure to depreciate further.

Read also: How To Sell USDT For Naira Without Using p2p

FG’s move

The naira has been falling to record lows since Friday after central bank Governor, Godwin Emefiele was suspended by Nigeria’s new president, Bola Tinubu. Under Emefiele, Nigeria’s central bank offered the US dollar through several windows at tightly controlled rates, with little liquidity, to businesses and individuals.

A stimulating economic plan is needed to corroborate its monetary policy if the nation is to witness a sustained appreciation of its currency. This is the ideal time for the country to grow its manufacturing and production economy.

There is no doubt that the country grows most of its own food, but imports a number of staples like wheat and rice, making currency weakness extremely sensitive for a poor population — around 60 per cent of whom were living on less than a dollar a day in 2010 according to the statistics bureau.

The FG, through the CBN, can also play with the interest rate and fiscal spending to make available more local currency. But with the country’s fiscal budget already set by the previous administration, the current administration’s fiscal might is already handicapped, at least partially.

In conclusion, the free-floating forex by the CBN no doubt can signify the end of the parallel market. It will also mean that imports cost more while exporters earn more. However, the purchasing power of Nigerians may become lower in the meantime pending when market forces begin to swing in favour of the Naira.