Nigeria: CBN Implements New Measures to Boost Forex Supply

The recent announcement of new measures by the Central Bank of Nigeria (CBN) to enhance foreign exchange inflow into the country has sparked positive sentiments and renewed confidence in the nation’s financial markets.

The stock market experienced significant gains, with the total market capitalization on the NGXchange rising by N998 billion to reach N32.662 trillion on the day of the measures’ announcement.

In the official forex market, specifically the Investors and Exporters (I&E) window, the new measures led to increased transactions, resulting in the exchange rate converging with the parallel market rate at around N756 per dollar within just one week.

Inspired by President Bola Tinubu’s call for a unified exchange rate, the CBN introduced these measures to revitalize the official forex market. The President emphasized the importance of directing funds away from arbitrage and towards meaningful investments in the real economy, such as plant, equipment, and job creation.

The CBN circular, signed by Director of Financial Markets, Dr. Angela Sere-Ejembi, outlined the “Operational Changes to the Foreign Exchange Market.”

Key highlights of the new measures include:

1. Abolishment of Segmentation: All forex market segments are now consolidated into the Investors and Exporters (I&E) window. Applications for medical expenses, school fees, Business Travel Allowance/Personal Travel Allowance (BTA/PTA), and Small and Medium Enterprises (SMEs) will continue to be processed through deposit money banks. All eligible forex transactions must be conducted via the I&E window, rendering other windows obsolete.
2. Willing Buyer, Willing Seller Model: The re-introduction of the “Willing Buyer, Willing Seller” model at the I&E window allows all eligible transactions to access foreign exchange at agreed-upon rates through authorized dealers. This model ensures mutually agreed exchange rates between buyers and sellers.
3. Government-Related Transactions: For all government-related transactions, the operational rate shall be the weighted average rate of the preceding day’s executed transactions at the I&E window, calculated to two decimal places. Government-related transactions refer to transactions involving Ministries, Departments, and Agencies (MDAs). The weighted average rate is determined by multiplying the volume of FX traded by the various rates at which the deals are consummated, divided by the total volume of trade.
4. BTA/PTA and Others: Foreign exchange for Personal Travel Allowance (PTA), Business Travel Allowance (BTA), and other invisible transactions can be accessed through banks at prevailing market rates. The application process and documentation requirements remain unchanged.
5. Order-Based Two-Way Quote: The re-introduction of order-based two-way quotes, with a bid-ask spread of N1, enables transparent trading. All transactions will be cleared by a Central Counter Party (CCP). The Order Book, an electronic trading system, ensures transparency and facilitates seamless execution of trades. Trading hours will be from 9 am to 4 pm Nigeria time.

Additional measures include the proscription of trading limits on oversold FX positions, permission to hedge short positions with Over-The-Counter futures, and zero limits on overbought positions. The CBN will cease the RT200 Rebate Scheme and the Naira4Dollar Remittance Scheme from June 30, 2023.

To complement these measures, the CBN has removed restrictions on domiciliary accounts, granting banks the directive to allow unrestricted access to funds in these accounts. Individuals with domiciliary accounts can now transfer up to $10,000 per day in cash deposits.

These policy changes are expected to lead to short-term depreciation of the naira in the I&E window, potentially adding to inflationary pressures and increasing the government’s debt profile. However, analysts widely applaud the measures for promoting transparency, boosting confidence in the forex market, and ultimately increasing the supply of foreign exchange to Nigeria.

According to experts, the measures will attract foreign investors who previously considered the naira overpriced, leading to inflows, potential naira appreciation, and unlocking significant investment opportunities. The liberalization of the forex market is expected to enhance investor confidence, reduce uncertainty, and minimize arbitrage, ultimately benefitting the Nigerian economy and government revenue.