By Fawaz Adebisi
Amidst Nigeria’s economic challenges, the Central Bank of Nigeria (CBN), under the current governor, Mr Olayemi Cardoso, has come up with some revealed some strategies it planned to take to address the complexities surrounding the country’s current forex crisis.
The CBN, in some statements and circulars to all banks and authorized dealers, unveiled a comprehensive policy aimed at addressing issues of market transparency, liquidity, and economic stability.
On January 29, 2024, the CBN reminded all Authorised Dealers of the permission to conduct financial market transactions on a ‘willing buyer willing seller’ basis, emphasizing the need for transparent pricing.
It expressed concern over inaccurate reporting practices, warning against market manipulation and affirming a commitment to a transparent and well-functioning financial market.
Also, on the same date, there was a market notice by FMDQ Securities Exchange about updates on the FX Rates Pricing Methodologies.
The updates included rigorous data validation and a temporary suspension of NAFEM Spot opening rates publication, with a call for accurate and prompt reporting from Dealing Member Banks.
On January 31, the CBN issued a letter to banks outlining prudential requirements on foreign currency exposures, emphasizing a 20% short and 7% long limit for Net Open Position (NOP) based on shareholders’ funds.
Banks were therefore instructed to comply by February 1, 2024, maintain natural hedging, align interest rates for borrowing, and adopt robust risk management systems for accurate and timely reporting to the CBN.
On the same day, the apex bank removed the allowable limit on exchange rates quoted by International Money Transfer Operators, shifting to a market-driven approach.
Here are 20 key aspects to understand about the new CBN policy on exchange rates:
1. Regulatory Strengthening: The policy calls for a robust regulatory framework, including stricter laws and enhanced surveillance, to identify and punish speculative activities and acts of sabotage within the forex market.
2. BDC Proscription: The policy suggests proscribing Bureau de Change (BDC) entities and revoking their licenses to curb speculative behavior.
3. FX Holding Restrictions: Individuals are prohibited from holding any foreign exchange (FX) outside of the regulated banking sector, emphasizing the need for electronic documentation of FX purchases.
4. Declaration at Entry: Individuals entering Nigeria must declare any FX they possess and deposit it with the CBN, ensuring transparency in the movement of foreign currency.
5. Deposit Money Bank (DMB) Licensing: New licenses would be issued to DMBs to trade FX, with increased capitalization requirements to strengthen the sector.
6. Market Transparency: The policy advocates for increased transparency in the forex market, urging regular reports and data sharing on exchange rates, liquidity, and currency flows.
7. Foreign Direct Investment (FDI): Encouraging FDI becomes a pivotal strategy to stabilize the FX market and boost economic growth.
8. Support for Local Production: By supporting local production, the policy aims to reduce FX demand and create more job opportunities, particularly in key sectors like agriculture and manufacturing.
9. Diversification of FX Sources: The CBN seeks to reduce reliance on oil exports by encouraging the development of other sectors like tourism, mining, ICT, and remittances to diversify FX sources.
10. Prudent FX Reserves Management: The CBN emphasizes prudent management of FX reserves, ensuring adequacy and sustainability to intervene effectively in the market.
11. Monetary Policy Coordination: Enhanced coordination of monetary policy with fiscal and structural policies is crucial to achieving macroeconomic stability and growth.
12. Public Education and Sensitization: The CBN aims to educate and sensitize the public about the new exchange rate policy through various channels, fostering understanding and support.
13. Naira Strengthening: Strengthening the Naira is a priority, involving measures to maintain price stability, ensure exchange rate stability, and enhance confidence in the local currency.
14. Policy Monitoring and Review: The CBN commits to regular monitoring and review of the policy’s effectiveness, making necessary adjustments based on data and feedback.
15. FX Demand Reduction: Policies will be implemented to discourage non-essential use of FX, including restrictions on specific items and limits on FX for personal and business travel.
16. FX Supply Increase: Measures to increase FX supply include encouraging repatriation of earnings, leveraging external reserves, and exploring external borrowings.
17. Flexible Exchange Rate Regime: The CBN contemplates adopting a flexible exchange rate regime, allowing the Naira to adjust to market forces.
18. FX Market Infrastructure Strengthening: Strengthening the infrastructure of the FX market is crucial for efficiency, transparency, and competitiveness.
19. Collaboration with Stakeholders: The CBN emphasizes collaboration with the government, private sector, civil society, and international community to address the FX crisis collectively.
20. Confidence and Trust Building: Building confidence and trust in the FX market is a key objective, requiring clear communication, transparency, and consistent policy implementation.
As the CBN charts this new course, with hopes, Nigerians expect the positive impact on the country’s economic landscape.
