In a strategic move to stabilize the volatile foreign exchange (FX) market, the Central Bank of Nigeria (CBN) announced that it sold $543.5 million to authorized dealer banks between September 6 and September 30, 2024. The transaction, which spanned 11 days, was conducted through a two way quote at the Nigeria Foreign Exchange Market (NFEM).
According to Omolara Duke, Director of the Financial Markets Department at the CBN, the decision was driven by increased demand for FX due to high importation of commodities and seasonal pressures. These factors were contributing to significant market volatility, which the CBN aimed to manage through these FX sales.
Market volatility, particularly in the forex space, has been a persistent challenge in Nigeria. The high demand for foreign currencies, especially for importation of goods, often leads to fluctuations in the exchange rate, affecting both businesses and consumers. To address this, the CBN’s move to inject $543.5 million into the market aims to meet some of this demand, thereby reducing the pressure on the naira and stabilizing the market.
The CBN also clarified that this intervention was conducted through T+2 transactions, a system where the settlement of security transactions occurs two days after the transaction date. The CBN hopes that this approach will ease the strain on businesses and individuals who depend on foreign exchange for their operations and transactions.
In a bid to enhance transparency and governance in the FX market, the CBN has introduced the Electronic Foreign Exchange Matching System (EFEMS) for conducting forex transactions. This system will bring significant changes to how foreign exchange is managed in the Nigerian market, allowing for a market driven exchange rate that is accessible to the public.
Omolara Duke expressed optimism about the new system, noting that it will reduce speculative activities and market distortions, both of which have long plagued Nigeria’s forex market. EFEMS is also expected to provide the CBN with improved oversight capabilities, allowing it to regulate the market more effectively.
To ensure a smooth transition to the EFEMS, the CBN has planned a two-week test run in November, after which real-time FX prices will be available to the public. This new system will not only bring transparency but also reduce market speculation, making FX rates more stable and predictable. Authorized dealers will conduct all foreign exchange transactions via EFEMS, and these transactions will be reflected immediately, enhancing the transparency of the entire process.
In addition to EFEMS, the CBN, in collaboration with the Financial Markets Dealers Association (FMDA), will publish rules for this new system. These guidelines are expected to ensure that all authorized dealers comply with the regulations and provide the necessary documentation and training ahead of the official launch.
The CBN has also introduced the Nigerian FX Code and revised Market Operating Guidelines to provide guidance to all participants in the foreign exchange market. These documents will play a key role in ensuring that all players, from authorized dealers to financial institutions, operate within the framework set by the CBN.
By aligning all market participants with these regulations, the CBN hopes to foster a more structured and efficient FX market that serves the needs of Nigeria’s growing economy. Authorized dealers are urged to comply with these guidelines and complete all necessary system integrations ahead of the EFEMS go live date.
The recent actions by the CBN reflect its commitment to a holistic foreign exchange management strategy aimed at stabilizing the market. As the demand for foreign currency continues to rise, especially for imports, the CBN is taking proactive measures to reduce volatility and create a more transparent and regulated market environment.
With the introduction of EFEMS and stricter market guidelines, Nigeria is moving towards a more modernized and efficient FX market. This system will not only curb market speculation but also ensure that foreign exchange rates are determined by real market dynamics, benefiting businesses and the overall economy.
As Nigeria navigates through its forex challenges, the CBN’s recent interventions may prove to be a crucial step in stabilizing the naira and creating a more predictable and accessible foreign exchange market for all.