On May 24th 2016, the Central Bank of Nigeria held a Monetary Policy Committee meeting and resolved that it is going to allow the Naira float freely at the inter-bank market. The meeting was attended by 9 out of its 12 members.

“In summary, the MPC voted to introduce greater flexibility in the inter-bank foreign exchange market structure and to retain a small window for critical transactions,” said Godwin Emefiele, governor of the Central Bank of Nigeria (CBN).

Analysts, however, have called this flexibility a ‘semi-float’ since the Central Bank still plans on holding on to the official exchange rate of N199 per US dollar for funding “critical transactions.”

According to a Senior Research Fellow at the Centre for the Study of the Economies of Africa, Dr. Solomon Olakojo, allowing the Naira to float freely means that the government is leaving the forces of demand and supply to determine the foreign exchange rate. This means that the more people demand for the Dollar, the more they will pay for it in Naira. For instance, during the resumption of schools abroad, affected Nigerian parents will demand for Dollars thereby leading to an increase in the exchange rate of a Dollar to the Naira. During this period, banks will then set their own exchange rate based on demand in order to sell to those willing to buy at higher rates.

Following this announcement, Nigerians will not be able to buy US Dollars at the CBN rate of 199. This means that people who want to make payments for school fees, business, tourism, medicals, holiday and other bills will not be able to buy at 199. They are now left at the mercy of the inter-bank market determined rates.

Banks, importers and individuals who also engage in round-tripping or arbitrage (buying funds from the Central Bank of Nigeria’s official market at low rate and resell in the parallel market at higher rates) – will not be able to do so anymore.

It is still unclear whether this move will work since Nigeria does not have the required operational framework in place to ensure that it achieves the desired result. There is no significant inflow of the Dollar to meet about 70 percent of the demand. In view of this, Nigerians cannot bet on the Dollar dropping below N300 anytime soon.