The country’s foreign exchange unification policy has garnered favorable sentiment in the financial landscape, enabling individuals and businesses to access financial services more efficiently. Experts say these steps toward a collective and transparent foreign exchange system could contribute to Nigeria’s economic recovery.
Following President Bola Tinubu’s decision to unify exchange rates in Nigeria, the Central Bank of Nigeria (CBN) has taken the initiative to allow the deposit money banks (DMBs) and foreign exchange market dealers to freely buy and sell forex at market-determined rates. This move marks a shift from the previous multiple forex regime to a “free-floating” system.
The foreign exchange unification policy has yielded positive developments in the country’s financial landscape. Customers have quickly embraced the initiatives introduced by the DMBs, which aim to provide seamless and convenient foreign exchange services.
With the option to convert FX to naira through online banking platforms, customers can now avoid the hassle of withdrawing cash and resorting to the parallel market for currency exchange. This shift reflects the increased confidence in the unified exchange rate system and the government’s commitment to creating a transparent and efficient FX market.
Smart Solutions For The FX Market
Recognizing the importance of diaspora remittances to the Nigerian economy, the CBN introduced measures to facilitate smoother transactions. A recent circular issued by the CBN announced that the naira is now a payout option alongside FX and the eNaira for the receipt of diaspora remittances.
In response to the evolving financial landscape, Nigerian banks are introducing innovative solutions to better serve their customers. One notable offering is the FX Cash Backed Loan, which enables domiciliary account holders to access naira loans of up to 85% of their available FX balance. This financial product allows individuals to meet their immediate financial needs without the requirement to withdraw or spend their FX holdings. By leveraging their FX assets as collateral, customers can access funds conveniently, supporting their personal and business objectives.
The suspension of international transactions on naira cards has been lifted by one of the banks, offering individuals greater flexibility in conducting cross-border transactions. This development allows cardholders to make international payments and purchases seamlessly, eliminating the previous limitations that hindered international financial interactions. The restoration of international transaction capabilities represents a significant step toward aligning Nigeria’s financial system with global standards and facilitating international trade and commerce.
Nigeria’s dollar-denominated sovereign bonds have experienced notable gains, reflecting the market’s positive sentiment. The announcement of the FX rules has resulted in an increase in the price of the country’s eurobonds, with some issues reaching their highest prices in months. Issuance matured in 2033 up 2.4 cents to 78.625 cents, the highest in over five months.
It is worth noting that Nigeria has been grappling with severe dollar shortages, which have led many individuals to seek foreign currency in the parallel market. The implementation of the foreign exchange unification policy aims to address these shortages by promoting transparency, reducing the reliance on the parallel market, and aligning the naira’s value with its official exchange rate. These efforts will contribute to a more stable and efficient foreign exchange market, providing individuals and businesses with greater certainty and access to FX.
Short-Term Pressure vs Long-Term Gains
The Nigerian government’s decision to unify exchange rates and implement comprehensive FX reforms is a significant milestone in the country’s economic journey. However, Nigerian economists note further efforts are needed to strengthen the export sector, increase FX earnings, and ensure effective control measures to prevent market distortions.
Subomi Plumptre, the Chief Executive Officer of Volition Cap, predicts a competitive market to the benefit of the public. Plumptre tells FORBES AFRICA: “The fact that customers can now convert dollars to naira on online banking platforms is expected to drive competition among International Money Transfer Operators (IMTOs). This could spark innovation leading to lower transaction fees and better rates for the public. The FX Cash Backed Loan, which offers naira loans to foreign currency holders, serves as an example of how easing foreign exchange regulations can stimulate innovation among financial service providers due to competitive pressures.”
She believes that “while the naira has depreciated substantially following the implementation of the FX unification policy, in the long-term, reduced FX intervention could yield positive outcomes.”
Plumptre adds, “A singular, market-determined exchange rate would improve transparency, eliminate opportunities for arbitrage and rent-seeking, and ultimately contribute to greater investor confidence and financial markets stability. In turn, these benefits could encourage dollar inflows, which may strengthen the naira’s exchange rate. The ongoing naira depreciation is part of the short-term price discovery process further driven by the fact that the official naira exchange rate was held artificially low, worsened by the stringent global financial conditions that underpin dollar shortages.”
Kelvin Emmanuel, an economist, commends the Nigerian government’s decision. “This is critical not only because the difference between official and parallel markets created a 63% black market premium for arbitrageurs that cost the government about $329 million every month in FX subsidy, but also because unification is going to address a chronic issue the Nigerian government has been battling with for years,” he tells FORBES AFRICA.
Emmanuel expresses excitement that “the decision to book independent revenues from government-owned enterprises, at investors and exporters rates, its decision to have the CBN create non-deliverable forwards for short- and long-term foreign investors is leading to appreciation of bond yield curve and bringing investors back into both the capital markets and the real economy.” He also believes that these reforms will contribute to economic reflation and long-term growth.
FX Round-Tripping And How It Affects The Market
Iheakanwah Felix Arinzeh, a financial expert and doctor of business administration, supports the recent FX policy, acknowledging “the need to defend the naira against excessive foreign exchange fluctuations.” However, Arinzeh emphasizes to FORBES AFRICA the importance of addressing the inadequate FX earnings and reserves by enhancing export infrastructure.
Arinzeh suggests measures to further strengthen the control of FX rates and discourage round-tripping. “In exploring the unending increase in the FX rate, particularly in the black/parallel market, FX round-tripping is one of the major causes. FX round-tripping is a situation where customers divert foreign exchange obtained from the CBN at an official rate to the black market for higher profits. The practice had created artificial FX scarcity and had denied users of foreign exchange even in their most basic transactions. I recommend that all export FX proceeds be converted via banks and that willing sellers should not in any way be allowed to nominate a willing buyer.”
“The harmonization of exchange rates requires a transition period for the adjustment of the exchange rate to align with the official rate. During this period, inflationary pressures may arise, especially if the parallel market rate was significantly higher than the official rate. However, with proper monetary and fiscal policies, these inflationary pressures can be managed effectively,” says Arinzeh.