Governor Yemi Cardoso of the Central Bank of Nigeria has disclosed that the foreign exchange market received a boost of over $1 billion in liquidity within the past few days.
Cardoso made this disclosure in a statement on Friday during a presentation on the Senate floor in Abuja. According to the CBN governor, there has been an upward shift in the FX market as a result of the recent reforms initiated by the apex bank.
He assured the Senate that the reforms have generated significant interest from foreign portfolio investors.
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“We have already begun to see shifts in a positive direction. Indeed, we have already begun to see positive results with significant interest from foreign portfolio investors which was a concern that has already begun to supply the much-needed foreign exchange to the economy.
“For example, upward of the last few days. We have had over $1 billion that have come into the market. And this quite frankly is the answer to the question,” he said.
In the past week, the naira had tumbled approaching the N1500/$ threshold on the official market prompting the CBN to take action by implementing a series of measures, including lifting the cap on exchange rates quoted by International Money Transfer Operators (IMTOs). Meanwhile, the apex bank had stated it would end CBN intervention finance programs.
However, the $1 billion inflow has yet to yield any positive impact on Nigeria’s FX crisis. As of Friday, the naira traded at N1,485/$1 in the parallel market while it closed at N1,479.47 at the official market (NAFEM) on Thursday.
The central bank has been accused by economic experts of contributing significantly to the naira’s depreciation.
Meanwhile, the CBN in a circular dated February 8 has removed the ±2.5% cap spread on interbank FX transactions. The circular also notes that restrictions on the sale of interbank proceeds have also been removed.
According to the circular signed by the CBN Director of Financial Markets, Omolara Omotunde Duke, the directive is in line with the objectives of the CBN’s current FX market reforms, which is to promote a “market-based price discovery system.”
“A key objective of the ongoing foreign exchange market reforms by the Central Bank of Nigeria is to promote a market-based price discovery system.
“Consequently, the Bank hereby discontinues any cap on the spread on interbank foreign exchange transactions and restrictions on the sale of interbank proceeds.”
“It added that authorized Dealers are to continue to conduct their foreign exchange transactions on a “Willing Buyer and Willing Seller” basis. In addition, they are to strictly adhere to high ethical standards in their dealings in the foreign exchange markets. This includes but is not limited to adopting appropriate price disclosures and transparency for transactions.
“Please note that all executed transactions are to be recorded immediately on the relevant treasury systems and reported to market authorities as stipulated.”
In a circular referenced TED/FEM/PUB/PC/001/006 issued on August 9, 2023, the CBN directed an exchange rate cap spread of ±2.5% of NAFEM’s previous day’s closing rate, for International Money Transfer Operators (IMTOs) and banks.
However, on January 31, the CBN released another circular removing the exchange rate cap for IMTOs. The move by the CBN aligns with the idea of liberalizing the market in order to allow the market to move in line with current market realities.
In June 2016, the CBN released the “Revised Guidelines for the Operation of the Nigerian Inter-bank Foreign Exchange Market”. According to the guidelines, allowed participants in the inter-bank FX market include the “Authorised Dealers, Authorised Buyers, Oil Companies, Oil Service Companies, Exporters, End-users, and any other entity the CBN may designate from time to time.”
A significant part of the 2016 guidelines was “Inter-bank funds shall NOT be sold to Bureau-de-Change.” However, with the new directive by the CBN, this guideline is effectively discontinued. What this entails is that authorized dealers in the interbank FX market would be able to sell the proceeds from the market to BDC operators as well as other willing buyers outside the market.