A flexible exchange rate system or a flexible exchange rate regime is an exchange rate system in which the federal government will have no control over the price at which foreign currencies will be sold in the country. The prices of foreign currencies in the country will be allowed to float depending on the market forces of demand and supply. In such system, the federal government can no longer say that the price of one dollar will be pegged at 197 naira per dollar or that the price of the British pound will be pinned at 245 naira per pound sterling. The price of these foreign currencies will be determined by the rate at which people buy and sell them (demand and supply).
Using the Dollar as an example; if the rate at which people request for dollar to buy things abroad, or to send to their families overseas, is higher than the rate at which dollar is supplied in Nigeria by independent marketers and by the government; that is if people request for more dollars than is available in the country, then dollar becomes scarce and its price will rise. (We all know that goods become costly when they are scarce). On the other hand, if the amount of dollar in the country is more than what people are asking for, to buy things abroad, or to send to their families overseas, the dollar becomes excess in the economy, then the price of dollar will fall as sellers will reduce their prices to attract more customers. In fact, in a flexible exchange rate system, if the demand for foreign currency is more than the supply the price at which that currency is sold in the country will rise. On the other hand, if the supply of foreign currency is more than the demand, then the price of the foreign currency will fall. In both cases, the government cannot interfere by fixing the price if it becomes too high or too low.
Presently, Nigeria is using a partial flexible (Dirty float) exchange rate system where the prices of foreign currencies are allowed to float according to the rate of demand and supply but under the close supervision of the government. In this system the government can control the price of foreign currencies so that it does not become too costly or too cheap through devaluation and revaluation. For instance, in Nigeria at present the price of dollar in the parallel market is 371 naira per dollar, while the government through the CBN is still selling at 197 naira per dollar. If it were in a flexible exchange rate system, every seller of dollar including the government will sell at the market price of 371 naira per dollar.
Why then do I say that adopting this policy now will be bad for the country?
In order to answer this question, we have to understand that the major source of dollar supply in this country Nigeria is the external reserve. The external reserve is the extra money gotten from the sale of crude oil after government has taken the budgeted amount and after the cost of extracting the crude oil has been deducted. This reserve is kept with the CBN in foreign currency denominations. For instance, if Nigeria budgets that the price of crude oil in 2016 will be 35 dollar per barrel, and eventually she sells a barrel of oil to china for 50 dollars, the government will collect then 35 dollars out of the 50 dollars, then the NNPC will collect about 10 dollars for paying the people that extracted the crude oil, leaving a balance of 5 dollars this will go to external reserve. While the other 45 dollars will be changed to naira for use in Nigeria, the remaining 5 dollars will be kept in the CBN as external reserve, so that when people need raw dollar they can come and buy. This is the major source of foreign currency supply in Nigeria, other sources are minor.
Due to the fall in the price of crude oil in the international market, foreign currencies has not been flowing into the country’s reserve and the one already saved by previous government is about to be used up, this is why the dollar in Nigeria is scarce and the price in the parallel market is high, though the government is still selling at 197 naira. This means that the demand for dollar in the country is more than the supply of dollar in the country. If a flexible exchange rate is put in place at this period when we do not have enough dollars for those who need it, then naturally, in a flexible exchange rate system, the price foreign currencies especially the dollar will start to rise. It may even rise up to 500 naira per dollar; mere rumors about the policy have already caused the price of dollar to rise from previous 365 naira to 371 naira within last week. This is because sellers of foreign currencies are hoarding, waiting for the policy. This evidently will plunge Nigerians into more hardship than she is in now, because it willdefinitely affect the price of items in the market even down to the smallest item.
Dear Mr. President if you really wish to adopt a flexible exchange rate regime, please wait till when we have enough foreign currency in our foreign reserve that will be enough to cater for the high demand for foreign currency, so that supply can be more than demand to avoid further rise in price of foreign currencies especially the dollar, we have suffered enough. I rest my case …..
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