The Morning after Devaluation
Oluseun Onigbinde

Free float is not a good idea, Managed float is.

Granted. Great read by the way. I would like to point out and share a few things.

Before the oil crisis, CBN adopted a managed float regime. Currently, they are adopting a somewhat fixed regime (with all the capital controls and restrictions; technical shut down of the interbank market).

The common denominator in both regimes is the intervention by CBN for exchange rate stability.

If you say we adopt a free float regime, are you suggesting the CBN leave the exchange rate totally to market forces?

In a free float regime, the naira will only move in one direction for obvious reasons —fundamentals of the country does not generally support the buying of naira to sell dollars. Besides that, CBN has always been the major supplier of fx in the market (from WDAS and RDAS eras to what we have now, the weekly Special Intervention) and removing the apex bank from the equation further reduces the supply of dollars. Speculators will reign supreme.

As a result, domestic productivity and competitiveness will need to be firstly addressed before a free floating approach can even be brought to the table.

However, if the CBN devalues, goes back to its managed float regime by relaxing some of its controls for flexibility. Some capital flows might come in, based on the new value of the naira, to help jumpstart the interbank market (or the CBN can support by injecting additional liquidity beforehand like Egypt did recently). The banks can start trading dollar-naira again, within a tighter currency band, with CBN intervening through weekly auctions or when the upper limit is breached.

This approach, with complementary fiscal policies, will serve the nation better.

In summary, If the CBN has no plan of changing the current exchange rate regime from what we have —a ‘fixed’ exchange rate system— back to a managed float regime, while relaxing some restrictions, then it makes no sense to devalue the naira because it will only shift the goalpost as you rightly said. But changing, all the way, to a free float regime will make matters worse.