(Ecofin Agency) - The decision was eagerly awaited by several actors. However, insufficient regulation could lead to excessive speculation and the value of the naira going excessively high to become unaffordable for small and medium-sized businesses, with banks being the main beneficiaries.

In a release issued on Wednesday, June 14, the Central Bank of Nigeria ended a policy that was consecrating the multiple exchange rate of the national currency, the naira with an official rate and several black market rates determined according to the various segments and the law of supply and demand. 

The change is in line with President Bola Tinubu's desire to quickly implement his reforms, after the cancelation of fuel subsidies. It also satisfies those who have campaigned for many years for the creation of a single foreign exchange market in Nigeria, with a market-determined rate rather than an active monetary policy.

Since the announcement, the naira has depreciated slightly. But, it remains close to 470 naira to $1. Faced with the pressure on foreign exchange reserves, Nigeria decided to set up several foreign exchange windows. One was managed by the Central Bank for the payment of bills on certain imports and government expenditures. But there was another market symbolized by the Abokifx platform, on which the Naira to US dollar exchange rate could sometimes exceed the official rate by 70%.  

The consequences of this new decision remain to be seen. Those supporting it explain that it will reassure money market investors, who will be more motivated to offer dollars if the local currency value reflects supply and demand trends. Indeed, foreign currency imports have fallen sharply in Nigeria, reaching their decade-low in 2022.

Other arguments often put forward by those supporting the move are the improved competitiveness of Nigeria's export products and the greater flexibility offered to the Central Bank to combat imported inflation. However, the Nigerian context requires us not to be too enthusiastic. This decision comes at a time when inflation is still high for reasons that are not so related to the monetary policy. 

The other risk is that inadequate regulation could boost speculation and set the value of the naira at levels unattainable for very small, small, and medium-sized enterprises. The Central Bank says it is ready to intervene, but oil prices that remain below $80 a barrel are putting pressure on foreign exchange reserves. The big winners are likely to be the banks, which will be able to generate more revenues from foreign exchange transactions after those same revenues were boosted with the high-interest rate policy adopted by the central bank to counter inflation.