Nigeria's Central Bank Unifies Forex Market, Promotes Liquidity and Stability

The Central Bank of Nigeria (CBN) has recently announced a significant overhaul of the Nigerian Foreign Exchange (FX) Market, with the goal of enhancing liquidity and stability. As part of this effort, the CBN has unified all segments of the forex market, eliminating the previously existing windows.

 In a press release dated 14 June 2023, the CBN outlined several immediate changes to the market operations, which include the adoption of a market-driven exchange rate system and the introduction of various measures to streamline transactions. These changes mark a significant departure from the previous fixed exchange rate system and aim to promote transparency and flexibility in the Nigerian FX Market.

Check here to download the CBN Forex circular

1.Abolishing Segmentation and Embracing Investors and Exporters (I&E) Window

Previously, the Nigerian FX Market was divided into different windows for various transactions. However, the CBN has now consolidated all transactions under the Investors and Exporters (I&E) window. This means that even applications for medicals, school fees, BTA/PTA, and SMEs will now be processed through deposit money banks within the I&E window. Additionally, the exchange rate in this unified window will be determined by market forces, reflecting a shift to a market-driven system.

2. Reintroduction of the "Willing Buyer, Willing Seller" Model:

To enhance flexibility, the CBN has reintroduced the "Willing Buyer, Willing Seller" model within the I&E window. Under this model, eligible transactions can access foreign exchange at rates of their preference, promoting efficient and transparent pricing.

3. Operational Rate for Government-Related Transactions

The CBN has set a new approach to determine the operational rate for transactions related to the government. This rate will be based on the weighted average rate of the previous day's executed transactions within the I&E window, rounded to two decimal places. This measure aims to ensure consistency and reliability in government-related transactions.

4. Enhanced Trading Practices: Removal of Trading Limits on Oversold FX Positions and Introduction of Hedging

In a bid to promote market efficiency, the CBN has abolished trading limits on oversold FX positions. Furthermore, participants will have the opportunity to hedge their short positions using Over-The-Counter (OTC) futures. However, there will be zero limits on overbought positions, ensuring fair and unrestricted trading opportunities.

5. Transparent and Order-Based Trading: Reintroduction of Order-Based Two-Way Quotes

The CBN has reintroduced order-based two-way quotes, maintaining a fixed bid-ask spread of N1. This approach enhances transparency by ensuring a consistent difference between buying and selling prices. Additionally, all transactions will be cleared by a Central Counter Party (CCP), further promoting fair and orderly trading.

6. Reinforcement of Order Book

To enhance transparency and facilitate seamless execution of trades, the CBN will reintroduce an Order Book. This mechanism will ensure that all orders are visible, promoting efficient order matching and execution.

7. Cessation of Remittance and Forex Supply Schemes

The CBN has announced the discontinuation of two schemes, the RT200 Rebate Scheme and the Naira4Dollar Remittance Scheme, effective from 30 June 2023. This decision marks a shift in policy, signifying a reliance on the new market-driven system for remittances and forex supply.

Implications of the Changes

•The changes implemented by the CBN mark a transition from a fixed exchange rate system to a more flexible and market-driven approach in the Nigerian FX Market. 

•With the unification of the forex market and the adoption of market forces, the exchange rate will be determined based on supply and demand dynamics within the Investors and Exporters (I&E) window. 

•Participants will have the opportunity to transact at their preferred rates, improving liquidity and fostering stability. 

•The introduction of transparent and order-based trading practices, along with the discontinuation of previous remittance and forex supply schemes, further aligns the Nigerian FX Market with global best practices. These changes are expected to bring about increased efficiency, transparency, and stability to the Nigerian economy as a whole.