The recent offloading of dollars by traders, prompted by the Central Bank of Nigeria’s (CBN) new foreign exchange framework, has given the naira a significant boost, resulting in considerable appreciation of the local currency across various market segments in recent trading days.
Analysts anticipate that ongoing concerns about the market may lead to increased panic selling, potentially driving the naira even higher in the coming weeks.
While the official market has witnessed rapid gains in the exchange rate, the parallel market presents an even more unsettling scenario for speculators, as the naira gains value at a rate that outpaces their selling efforts.
By the end of the week, operators informed Business Hallmark that the exchange rate stood at N1,570/$1, a sharp decline from N1,700/$1 earlier in the week, as the naira continued its robust recovery against the dollar.
On Monday, December 2, the CBN launched the Electronic Foreign Exchange Matching System (EFEMS), a new electronic platform designed to combat speculation and enhance transparency in Nigeria’s foreign exchange market.
In a circular announcing the EFEMS platform, the apex bank explained that it facilitates spot foreign exchange transactions between the naira and the U.S. dollar. Operated through Bloomberg’s BMatch system, the platform requires a minimum trade value of $100,000, with incremental trade sizes of $50,000.
The CBN stated that the platform automatically matches buy and sell orders, promoting fairness and efficiency in FX trading. EFEMS enables authorised dealers, including commercial banks, to place buy and sell orders in real-time, with transactions matched based on predetermined rules, ensuring rapid execution and real-time visibility for market participants and regulators.
At the recent Chartered Institute of Bankers (CIBN) 59th annual bankers’ dinner in Lagos, CBN Governor Olayemi Cardoso described EFEMS as a transformative step towards market transparency and accurate price discovery.
He remarked, “The unification of the exchange rate is a pivotal reform, but it marks just the beginning. On 2nd December 2024, the foreign exchange market will commence trading on the electronic FX matching system to further enhance transparency, restore confidence, and attract new investments.
“Alongside an improved framework for deploying products aimed at the Nigerian diaspora, we expect to see increased diaspora and foreign investments over the next 12 months, contributing to the development of a more resilient and liquid FX market.”
Cardoso noted that over the past year, the CBN has implemented crucial reforms to unify Nigeria’s exchange rate, eliminating distortions and restoring transparency. He also addressed common misconceptions about the FX market, underscoring the role of EFEMS in countering panic-driven distortions.
He stated, “It is essential to address the misinformation regarding a supposed demand-supply gap in the FX market, which is fueling unnecessary panic.
“The current USD exchange rate reflects the price that the most desperate buyers are willing to pay, and this does not accurately represent the true market value of the naira.
“The introduction of the electronic matching system will correct these distortions by enhancing the price discovery process. Furthermore, it will significantly bolster the central bank’s oversight and intervention capabilities, ensuring a more stable and transparent foreign exchange market.”
Rapid Recovery
It is no surprise that the new policy has led to significant gains for the naira, which was trading at N1,587.29 to the dollar in the official market, while the parallel market rate reached N1,640.
Having depreciated to a record low of N1,755 per dollar on November 21, 2024, before the new FX policy implementation, the naira has since recovered by 18.8 per cent, or N240, to its current rate of N1,640 in the black market.
In the official market, the naira also registered an appreciation of 2.08 per cent, or N32, with the dollar quoted at N1,535 on Friday, compared to Thursday’s closing rate of N1,567 at the Nigerian Foreign Exchange Market (NFEM), according to CBN data.
A breakdown of movements in the parallel market last week showed that gains began to emerge on Tuesday, with rates at N1,720/$1, up from a stagnant N1,745/$1, which had held steady for over a month. On Wednesday, the naira strengthened further to N1,670/$1 and then to N1,640/$1 on Thursday.
In the official market, CBN quotes for the NFEM indicated that average rates started at N1,662.77 on Monday, improved to N1,644.78 on Tuesday, and further rose to N1,613.86 on Wednesday, before reaching N1,587.29 on Thursday.
Cautious Optimism
Some financial experts have expressed cautious optimism regarding the potential of EFEMS to tackle the long-standing challenges facing the naira and Nigeria’s foreign exchange reserves.
However, others have voiced reservations. They noted that while the commencement of supplies from Dangote Refinery to product marketers and EFEMS may have provided a marginal boost to the naira’s exchange rate, the recent surge in dollar liquidity is largely attributed to the festive season, making it an unsustainable shift.
Okunkle Olubunmi, Head of Financial Institutions at Agusto & Co, regards the new platform as a significant advancement. He highlighted its potential to bring together key market participants while ensuring that transactions are conducted transparently.
“What EFEMS has achieved is a redefinition of the market. It is a means of sanitising the foreign exchange sector. All the major players, including the serious BDC participants, can engage in this market. It also involves digitising the system, leading to more transparent pricing,” stated Olubunmi.
Tilewa Adebajo, Chief Executive Officer of CF Advisory, applauded the initiative but cautioned that it may be premature to credit the significant appreciation of the naira to it.
“The new foreign exchange matching system is a welcome development for price discovery, aiming to enhance sophistication in our markets and eliminate discrepancies,” Adebajo remarked.
“However, it’s too early to attribute the naira’s appreciation solely to this system. We must wait to see how it unfolds. Nevertheless, transparency in any market is vital, and this is an important step toward achieving it.”
Investigations revealed that the market is experiencing considerable panic selling, particularly among speculators who had stockpiled dollars in anticipation of the naira’s ongoing depreciation.
Traders, speaking anonymously to Business Hallmark, indicated that many of their suppliers are eager to sell, as nobody wants to hold onto a currency that is rapidly losing value against the naira.
Reliable sources indicated that suppliers are selling dollars at rates as low as N1,500 per dollar on the parallel market, considerably lower than the rates available on the official market.
[Hallmark]
