Market News

by Collins Nweze | Assistant Business Editor

• Analysts: Days of forex speculation, distortions over

The era of foreign exchange (forex) speculation and distortions in the domestic forex  market is over as the Central Bank of Nigeria (CBN)-backed Electronic Foreign Exchange Matching System (EFEMS) begins operation today.

The implementation of the forex policy, announced last month, and confirmed by CBN Governor, Olayemi Cardoso at the weekend, comes with diverse implications for all segments of the financial markets that deal on forex, including expected rebound in the value of the naira across markets.

The naira exchanges at N1,720 to dollar at the parallel market, and below N1,663 to dollar at the official window.

Analysts said the system is expected to instantly reflect data on all forex transactions conducted in the interbank market and approved by the CBN.

The CBN will also publish real time prices and buy-sell orders data from this system.

Nigeria is facing an acute forex crisis, but there have been market distortions by speculators and illicit traders, which worsen the nation’s dollar availability.

Hence the system was launched in a bid to give the CBN improved oversight capabilities to effectively regulate the market, reduce the rate of speculation and stabilise the foreign exchange market.

The CBN will publish the rules of engagement for the EFEMS for both authorised dealers and buyers, in collaboration with the Financial Markets Dealers Association (FMDA).

The Nigerian forex  code and the revised market operating guidelines are also available to provide guidance to market participants.

President, Association of Bureaux De Change Operators of Nigeria (ABCON), Aminu Gwadabe, said the takeoff of the EFEMS is a step in the right direction.

According to him, the EFEMS will not only bring sanity to the market, but ensures that new entrants into the market, including post recapitalisation Bureau De Change Operators- will simply fit it, and follow set guidelines that promote transparency and accountability.

Gwadabe said: “It is a good development as the CBN has cleared post recapitalization BDCs to participate in the new EFEMs platform. Section 2.0 of the BDCs operational guidelines recognizes post-recapitalisation BDCs to participate in the EFEMS by purchasing interbank proceeds from banks”.

He said the move will boost forex liquidity in the retail end of the market, achieve price discovery, enhance transparency and regulatory policy oversight.

He added: “It is line with our advocacy for a unified, centralized and democratized foreign exchange market. We wish the policy is effective before the conclusion of the BDCs recapitalization process. It is another spice  to encourage BDCs in meeting the new recapitalisation requirements and raises hope for members and new entrants into the forex market”.

Speaking at the 59th Bankers Annual Dinner organised by Chartered Institute of Bankers of Nigeria (CIBN), in Lagos, the Cardoso described EFEMS as one of the many gains of the exchange rate unification policy, expected to birth several other gains in the market operation.

He said the policy will not only put forex market distortions under check, eliminate speculative activities and instill transparency, but will also make it difficult for abuse in the market to persist.

He said: “On the 2nd of December 2024, the foreign exchange market will begin trading on the electronic FX matching system to further enhance transparency, restore confidence, and attract new investments.”

 “Coupled with an improved framework for deploying products targeting the Nigerian diaspora and efforts to establish a well-functioning FX market, we anticipate increased diaspora and foreign investments over the next 12 months, building a more resilient and liquid FX market”.

Cardoso said an enabling policy environment has led to a doubling of monthly remittances from an average of $300 million in 2023 to nearly $600 million in August 2024.

 “We are committed to further integrating the Nigerian diaspora into our financial system, exemplified by the introduction of the non-resident Bank Verification Number registration. We expect our financial institutions to develop products that not only enable the diaspora to support their families but also provide opportunities for savings and investment in Nigeria,” Cardoso said.

Cardoso said the current exchange rate for the naira does not reflect the true value of the local currency.

He said the current US dollar exchange rate reflects the price that the most desperate buyers are willing to pay, and this, in the apex bank’s view, does not represent the true market value of the naira.

The CBN boss said the apex bank expects that the introduction of the electronic marketing system will correct these distortions by enhancing price discovery process for the naira.

 Additionally, he stated that the move will significantly boost the central bank’s oversight and integration capabilities, ensuring a more stable and transparent foreign exchange market.

Cardoso also said that an FX market defined solely by when and how the central bank buys or sells dollars is inadequate for the needs of a dynamic economy like Nigerians.

“Now is the time for banks to step up to their intermediation and market making responsibilities providing customers with the right solutions to run their businesses and manage risk effectively, “ he said.

The EFEMs journey started with a circular signed by Omolara Duke, director of Financial Markets Department, the bank said with this system, authorised dealers will conduct all forex transactions in the inter-bank market on the EFEMS system approved by the CBN, where transactions will be reflected immediately.

 “The new system is expected to enhance governance, transparency and facilitate a market-driven exchange rate that will be accessible to the public.  This development is expected to reduce speculative activities, eliminate market distortions and give the CBN improved oversight capabilities to effectively regulate the market,” the apex bank noted.

The CBN said it will publish real-time prices and buy/sell orders from the system. The CBN noted that in collaboration with the Financial Markets Dealers Association, it will will publish the rules for the EFEMS.

It further said that the Nigerian FX Code and the Revised Market Operating Guidelines for the forex market will also provide guidance to market participants.

 “Authorised dealers are therefore required to comply with extant guidelines and regulations governing the Nigeria foreign exchange market and ensure that all necessary documentation, training and systems integrations are concluded ahead of the go live date.”