Floating the Naira means allowing the exchange rate to be determined by market forces, rather than by a fixed peg to the US dollar or a basket of currencies. While this may seem appealing to some, as it would reflect the true value of the Naira and potentially attract more foreign investment, it also comes with significant risks and challenges.
First, floating the Naira would expose the economy to more volatility and uncertainty, as the exchange rate would fluctuate depending on supply and demand, as well as external shocks and speculations. This could lead to inflation, capital flight, currency crises, and reduced competitiveness of domestic industries.
Moreover, floating the Naira would require a strong and independent central bank that can effectively manage the monetary policy and intervene in the market when necessary. However, Nigeria’s central bank has been subject to political interference and pressure from various interest groups, which could undermine its credibility and autonomy.
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Second, increasing production before considering floating the Naira would help diversify the economy and reduce its dependence on oil exports, which account for about 90% of foreign exchange earnings and 60% of government revenue. By boosting the non-oil sectors, such as agriculture, manufacturing, services, and tourism, Nigeria could create more jobs, increase income, improve trade balance, and enhance resilience to external shocks. Increasing production would also increase the demand for foreign exchange, which would appreciate the Naira and make it more stable and attractive.
Why is floating the naira important? Because it will reflect the true state of the economy and send the right signals to the policymakers and the private sector. A fixed exchange rate regime, as Nigeria currently has, creates distortions and inefficiencies in the allocation of resources. It also encourages rent-seeking and corruption, as some privileged individuals and groups can access foreign exchange at subsidized rates, while others have to pay a premium in the parallel market.
A floating exchange rate regime, on the other hand, will eliminate these distortions and create a level playing field for all economic actors. It will also force the government to adopt more prudent fiscal and monetary policies, as it will no longer be able to rely on depleting the foreign exchange reserves to defend the naira.
However, floating the naira alone is not enough. It has to be accompanied by other structural reforms that will enhance the competitiveness and resilience of the Nigerian economy. These include improving the business environment, investing in infrastructure, diversifying the export base, promoting innovation and entrepreneurship, strengthening the financial sector, and enhancing human capital development. These reforms will help Nigeria to reduce its dependence on oil revenues, increase its non-oil exports, attract more foreign direct investment, and create more value-added activities in the economy.
Therefore, I argue that increasing production before considering floating the Naira is a sensible and sustainable approach to achieve economic growth and development in Nigeria. Floating the Naira should not be seen as an end in itself, but as a means to an end. It should only be considered when the economy is ready and prepared for it, with adequate institutional capacity, fiscal discipline, monetary credibility, and structural reforms.