floating exchange rate

Adoption of Nigeria’s Floating Exchange Rate System
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Institution

Adoption of Nigeria’s Floating Exchange Rate System
High oil prices and debt default lead to the collapse of the gold standard in the 1970s which was being used to back most currencies. Consequently, countries were forced to move to other systems like the floating or fixed-exchange-rate system. Nigeria adopted a fixed exchange policy.
Nigeria’s economy grew fast during the oil price boom thus overtaking South Africa to become the largest economy in the continent. It invested internally as well as in other countries. However, the economic weaknesses of the nations came to light when the oil prices fell drastically. The decline of dollar receipts from oils sales created a scarcity of dollars and made it hard to import commodities. The shortage of dollars led the parallel dollar market to erupt thus worsening the shortage. It becomes hard for a nation to settle its dollar commitments where the exchange rate market becomes illiquid due to the scarcity of dollars.
When a nation is pursuing economic development, one of the tools it can utilize is the management of its exchange rates. Therefore, a country has to ensure that the exchange rate works for them and not against them (Carbaugh, 2010). Nigeria had no option but to adopt a floating exchange rate system due to the difficulty in servicing the foreign debts and the illiquid of the exchange rate market. This move intended to reduce the imports stemming out from the devaluation of the nation’s currency and the parallel market.

It was also to control the declining foreign exchange reserves in the nation’s Central Bank. The Naira initially cheapened against the Greenback but it found its true value. By adopting the floating exchange rate Nigeria is assured of stability on the balance of payments and will have adequate shield from the imported inflation.

Reference
Carbaugh R.J. (2010). International Economics. South-Western Cengage Learning.