By Sophia Chukwufumnaya and Emmanuel Agherario
The Central Bank of Nigeria (CBN) serves as the apex financial authority and primary regulatory body responsible for overseeing and regulating Nigeria’s financial system. Its mandate encompasses preserving the nation’s foreign exchange reserves, safeguarding the value of the Nigerian currency, establishing a stable financial system, and promoting sustainable economic growth.
To achieve its objectives, the CBN is granted the authority to develop and implement various policies and regulations that govern the operations of banks, financial institutions, and other segments of the financial system.
On June 14, 2023, the Central Bank of Nigeria issued a press release announcing significant changes to the foreign exchange market, which is believed to be in line with President Bola Tinubu’s commitment to unify the multiple foreign exchange markets in the country.
Previously, Nigeria operated a fixed exchange rate system in which the CBN determined and maintained an official exchange rate against a specific reference currency or a basket of currencies. However, sustaining the fixed exchange rate system became challenging due to factors such as declining oil prices, reduced revenue, and increased demand for foreign currencies.
These challenges led to the depletion of the country’s foreign reserves, which play a crucial role in supporting the stability of a fixed exchange rate regime. When foreign reserves are depleted, it becomes increasingly difficult for the central bank to sustain the fixed exchange rate, potentially resulting in currency depreciation and economic instability.
As Nigeria faced difficulties meeting the demand for foreign currencies, a parallel market emerged where individuals and businesses engaged in buying and selling foreign currencies at rates higher than the official fixed rate.
This created a divergence between the official exchange rate and the parallel market rate, leading to inefficiencies, market distortions, and a lack of transparency. In response to these challenges, the CBN introduced a new policy to regulate the foreign exchange market.
Some of the key changes introduced by the CBN’s new policy are:
· The abolition of segmentation within the foreign exchange market
This entails collapsing the Special Secondary Market Intervention Sales (SMIS) window and the Small and Medium Enterprises window into the Investors and Exporters (I&E) window. The I&E window operates as an over-the-counter platform where buyers and sellers can freely negotiate and determine exchange rates based on market forces of supply and demand.
This change aims to minimize the disparity between the official and parallel exchange rates, boost investor confidence, and attract foreign inflows into the country. As a result, various transactions, such as medical expenses, school fees, basic travel allowances, personal travel allowances, and transactions by small and medium-sized enterprises, will be processed through bank deposits.
· The reintroduction of the willing buyer, willing seller model in forex transactions
Under this model, both the buyer and the seller voluntarily enter into trades based on their own assessments of the currency’s value. The exchange rate is determined through negotiations between the parties involved, taking into account market conditions, supply and demand dynamics, economic indicators, and other relevant factors.
· The cessation of two specific schemes
The RT200 Rebate Scheme and the Naira4Dollar Remittance Scheme The Naira4Dollar Remittance Scheme incentivized individuals or entities in Nigeria to receive foreign currency remittances through approved channels, offering them an additional monetary reward from the CBN. Recipients were entitled to an extra Naira payment at an agreed exchange rate for every USD received as a remittance.
Similarly, the RT200 Rebate Scheme granted a rebate of 65 Naira to exporters for every dollar of non-oil export proceeds sold to third parties using the I&E window. Both of these schemes are set to end on June 30, 2023, as per the press release.
· The reintroduction of the Order Book
This is another great feat. The order book is an electronic trading system where demand can be matched to supply on any given trading day and is visible to the entire market. The visibility of the order book to the entire market allows participants to make informed decisions based on real-time information.
In addition to this, the order book reduces reliance on intermediaries and promotes direct interaction between buyers and sellers.
The impact of these new rules and changes introduced by the CBN will be felt across various sectors of Nigeria’s economy. This includes implications for activities within the FX black market, potential effects on fuel prices and the cost of food, and the potential impact on Foreign Direct Investment as well as foreign portfolio investment.
Overall, these changes aim to streamline and enhance the efficiency and transparency of the foreign exchange market in Nigeria, which is viewed positively by market participants and stakeholders.
It is therefore essential for individuals and businesses to stay informed about official communications from the Central Bank of Nigeria and seek guidance from authorized financial institutions to understand the implementation and implications of these changes in the foreign exchange market.
- Chukwufumnaya and Agherario are Associates at Olisa Agbakoba Legal