What are the reasons of making the new currency mode? Are there any minuses of this policy? Read the information below to learn the latest news about flexible program.
Foreign exchange currency mode
Central bank of Nigeria has published information about how its new currency policy will work. The governor of Bank on Wednesday has presented a new Managed Float Exchange Rate System mode. Earlier the bank has told that it will begin the international currency policy on Monday to increase delivery of steady currency. The governor said that currency reserves of Nigeria have decreased approximately from $42.8 billion in January 2014 to approximately $26.7 billion since June 10, 2016. The average constantly decreases as prices of oil remain low. Nigeria depends on oil more than at 80 percent. To avoid further exhaustion of stocks, Godwin Emefiele said that CBN decided to accept strategic actions to arrange on priorities the most critical needs for foreign currency and also to maintain stability in exchange rate.
While the main bank adhered to ratio in N197 to dollar, despite shortage of dollar in the official foreign exchange trading, several companies in Nigeria have been struck. They had to establish hard currency in the black market where the ratio made N360 to 1 dollar. Many small business enterprises have also been struck with the income. Now, when CBN is going to make new foreign exchange market, a lot of things will change.
Many companies will start their work again
Some enterprises have suspended their activity because of deficiency of the steady currency necessary for maintenance of their actions. A new policy would guarantee availability of foreign currency and would help to return their activity on former level. For last several months, many companies complained of how deficiency of foreign currency has mentioned their companies. Now they can come back to work effectively.
Probability of decrease of the inflation rate
Contrary to many opinions, only a few companies really had CBN level. Operational costs have risen for last year, as some manufacturers had to carry out delivery of foreign currency for import of raw materials from the parallel market. Others had to wait for several weeks to be able to get access to forex of the central bank. It has led to jump in goods prices. Inflation has increased to 15.6 percent in May, and the seventh month in a row it continues to increase.
Nigeria is a net importer of food and purified fuel. However, it couldn't cover all needs of forex for import for last months. For example, oil-marketing specialists, as it was reported in May, were given a signal to put foreign currency to import gasoline to the country at autonomous exchange rate of N298 to 1 dollar. However, liberalization of the foreign exchange market, as expected, will increase liquidity. If it occurs, then importers will begin to deliver Forex at cheaper rates. Nigerians will be able to feel it on the prices.
Foreign exchange programs will help to get trust of investors
Days later after the bureau of statistics of Nigeria has published the report having shown GDP of the country contracted in the first quarter of 2016, Central bank declared that it would accept the flexible currency mode to stimulate sustainable economic growth. The GDP was reduced for the first time in twelve years, unemployment increased, use of production capacity weakened and the confidence of investors was in decline. The decision not to squeeze currency policy is the most rational in this situation.
Influence of political action already existed in the country. The Nigerian stock exchange has come back to profit. The trust of investors was restored, and citizens can expect the improved inflow of the capital.
Cons of foreign exchange rate
There are many positive sides, which allow supporting new currency policy, but there are also negative moments. One considerable con is that probable, banks of unprofitable loans should argue with such policy.
The first Bank has reported about 82 percent decrease of profit for 2015 after write-off of value of unprofitable loans. More unprofitable loans will be written off by financial institutions in 2016. The real purchase strength of Naira is no more than 199 to dollar. The international bank trading, according to new recommendations, will begin its work on Monday and the dollar won't be exchanged at the old rates. People who have taken foreign loans at rate of N160 have to pay almost twice more.