Perhaps, we can now dump our fear of a “Naira Float.”

Until April 24, the outlook for the Nigeria naira was looking quite gloomy. In fact, in February, the naira had hit an all-time low in the black market of about N520 sending panic across the country as fears of runaway inflation stared Nigerians in the face. Being an import dependent country, the weakness of the naira always spell trouble for the prices of goods and services in the country.

However, seeing that it was failing in one of its core mandate of price stability, mainly due to a weakening naira, the Central Bank of Nigeria (CBN) began a series of interventions in the foreign exchange market that improved the dollar liquidity in the market and reversed the downward spiral of the naira. But the master stroke for the CBN was the introduction of a special window for investors and exporters. It was not just in the introduction of the window but the fact that the CBN promised not to fix the exchange rate of the naira to the dollar in the investors and exporters window.

In a memo to banks announcing the introduction of the new window, which was one of at least five different windows in which the naira is traded at different rates, the CBN noted that the purpose of the window was to “boost liquidity in the foreign exchange market and ensure timely execution and settlement of transactions.” Most importantly, the CBN agreed that the exchange rate in this window shall be determined through “price discovery” which basically meant that that the CBN was saying that unlike the other existing windows, where the CBN basically determined the exchange rate, in this new window, buyers and sellers would be allowed to determine the rate at which they were willing to buy or sell the dollar. The only concern was the fact that the CBN also said that it had the right to intervene in the market.

However, the investors and exporters window was the closest thing to the “Naira Float” that investors have been asking for in order to start investing in both the financial market and the real sector of the economy again. Figures released by the National Bureau of Statistics (NBS) last week clearly shows that investors have responded positively to the CBN move.

While total inflows in the first quarter of 2017 stood at US$909 million, it surged by 95 percent or $884.1 million in the second quarter to cumulative inflows of US$1.79 billion.  While investment inflow in the first quarter were always less than US$500 million a month, in the second  quarter of the year, investment inflows never fell below US$500 million in any month. On a month on month basis, the economy attracted the largest inflows in May of 2017, the first full month after the introduction of the investors and exporters window, recording inflows of  $616.5 million, followed by June with $612.6million and then April with $563.3 million.

The US$1.79 billion of inflows recorded in the second quarter was 43.6 percent more than the $1,042.2 million recorded in the same period on 2016.

The NBS, in its report notes that the main driver of the quarterly growth in capital importation in the second quarter were Portfolio Investments, which increased by 145.7 percent, followed by Other Investments, which grew by 95.02 percent, and then Foreign Direct Investment (FDI), which increased by 29.8 percent over the previous quarter. Even though portfolio investment is attracting significant inflows, the real sector of the economy is also benefiting from the jump in inflows.

Besides the equity market other sectors that are benefitting from the inflows include telecommunications, which attracted total inflows of US$320 million in the first half of 2017.  The services sector also attracted significant inflows of US$292 million, the same amount that also went to the Oil and Gas sector, while the banking sector attracted total inflows of US$216 million within the period.

The significant dollar inflows into the economy in the second quarter of the year has turned the Nigerian capital market from one of worst performing markets in the world to the best performing currently with the All Share Index (ASI) already up 37 percent this year.

Also, significantly, the fear that a “Naira Float” or the more flexible pricing of the naira in the investors and exporters window will lead to a collapse of the naira has not materialized. Instead, that exchange rate in the investors and exporters has continued to strengthen from an opening rate of about N385 in April to last week Friday’s closing rate N361 to the US$, just about the N9 better than the N370 rate quoted  in the black market on the same day.

Even though the CBN has stuck with its official rate of N305 to the US$,  there is no doubt that the reference rate for transactions in the private sector has become the more transparently priced investors and exporters window rate. Total transactions in the investors and exporters window is already estimated to have crossed the US$7 billion mark since it was introduced with  indications that the confidence of investors in the window is increasing by the day and therefore attracting more inflows into the economy.

The purpose of the CBN in introducing the window has therefore been largely achieved. The next challenge is in sustaining it. Most investors are still nervous about the multiple official rates in the market and especially the fact that the government still has its budget and future economic projections hanging on the largely unrealistic N305 to the US$ exchange rate. The expectation is that the CBN move towards collapsing all other rates into the investor and exporter’s window and allowing that rate in that window become the only rate in the market, even though it is clear that this may not be a politically popular decision with politicians eyeing re-election 2019.

Yes, there is the risk that allowing the investors and exporters window to determine the exchange rate will have an immediate significant impact on inflation, especially on the pump price of fuel and power tariff, two key sectors that have a significant impact on inflation. But the shock impact is likely to be short lived since many sectors of the economy already price their services and products on the black market rate and investors and exporters rate. Also, as has been seen since the introduction of the investors and exporters window in April, a more flexible exchange rate, accompanied with the initiatives in the ease of doing business and other business incentives like privatisation, could spark inflows that could actually strengthen the naira rather than weaken it. So far, the evidence as seen in the second quarter capital inflows, show that the fear of a “Naira float” is exaggerated.