In a bold shift towards a more liberalized foreign exchange regime in Nigeria, the Central Bank of Nigeria (CBN) has issued a circular, removing the previous cap on exchange rates quoted by International Money Transfer Operators (IMTOs).
This move follows a series of measures taken by the CBN to address suspected cases of excessive foreign currency speculation and hoarding by Nigerian banks.
The circular titled “Removal of Allowable Limit of Exchange Rate Quoted by the International Money Transfer Operators” marks a departure from the previous restrictions placed on IMTOs. Under the previous regulations, IMTOs were required to quote rates within an allowable limit of -2.5% to +2.5% around the previous day’s closing rate of the Nigerian Foreign Exchange Market.
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However, the new circular introduces a more flexible approach, allowing IMTOs to quote exchange rates for naira payouts to beneficiaries based on prevailing market rates at the Nigerian Foreign Exchange Market. The CBN emphasized that this would follow a “willing seller, willing buyer” basis, indicating a shift towards a market-driven determination of exchange rates.
Reasons Behind the Change
The previous regulations were implemented to maintain stability and consistency in exchange rates used for international money transfers. However, the recent circular reflects a strategic policy shift by the CBN. The removal of the -2.5% to +2.5% cap signifies a move towards a more liberalized foreign exchange market.
This change is primarily aimed at addressing Nigeria’s forex liquidity challenges and the resulting exchange rate depreciation, which closed at N1,455/$1 on Wednesday, January 31, 2023.
The removal of the cap on IMTO exchange rates represents a significant step by the CBN towards a more open and market-driven foreign exchange system in Nigeria. This approach is expected to foster more transparent and competitive pricing for customers engaged in international money transfers.
Sources familiar with the policy have indicated that these changes are designed to incentivize IMTOs to bring their forex supply into Nigeria, rather than keeping it abroad. Previously, due to exchange rate limits, diaspora Nigerians using IMTOs to send money home were unable to sell forex at market rates, resulting in reduced forex liquidity in Nigeria.
With the removal of these limits, the CBN believes that IMTOs can now trade forex at prevailing market rates, potentially including rates similar to the black market. This adjustment is anticipated to increase forex inflow into Nigeria and boost liquidity in the foreign exchange market.
Implications for Individuals and Businesses
The CBN’s decision to liberalize exchange rates is likely to have a considerable impact on individuals and businesses engaged in international transactions. Customers using IMTOs may now experience more transparent and competitive pricing, reflecting market forces of supply and demand.
The move, which signifies the CBN’s commitment to creating a more flexible and market-oriented foreign exchange environment, is expected to augment other measures earlier initiated by the apex bank to enhance the overall health and efficiency of Nigeria’s financial sector.
Analysts express confidence in this strategic decision, anticipating its success. They note that the resulting impact will be that IMTOs will be motivated to transport physical currency into Nigeria, as they can now apply a genuine market rate for their services.