In the next few days, the naira is expected to rebound and regain its real value after series of reforms introduced recently by the Central Bank of Nigeria (CBN).
The reforms were to clean the Augean stable and make the naira appreciate as well as find its true value amongst other currencies across the world.
Though the naira value has been dwindling over the years, the CBN, through its recent monetary policies, has been able to stem the tide.
The policies introduced in the last few days, according to financial experts, will make the nation’s currency achieve its true value or march toward a more stable foreign exchange (FX) market.
For instance, on January 29, 2024, the CBN issued a circular titled ‘Financial Market Price Transparency.’ The circular directed all authorised dealers in the foreign exchange market to desist from reporting inaccurate and misleading information on transactions concluded in the financial market.
In a circular to all the market dealers, the CBN said investigations revealed instances of underreporting of transaction rates and the practice of ‘second cheques’ on foreign exchange and fixed-income transactions.
The CBN had permitted financial markets transactions to be conducted on a ‘willing-buyer-willing-seller’ basis, by which prices are expected to be quoted and displayed transparently.
According to the bank’s circular, many of the players in the market are reported to be flouting the order, thereby causing distortions in the market.
However, with that circular, the CBN directed banks to report transactions at the price that they were helping customers settle. The circular was basically for price correction and to achieve market transparency.
In another development, on January 29, FMDQ issued a market notice of revision to the FMDQ FX market rate pricing methodology. This notice was issued late on Friday the January 26 and effective on Monday, January 29. It was obviously deliberately timed to coincide with the CBN circular on market transparency.
The implication of these two actions means that banks could now sell FX at market rates and FMDQ could accurately report it.
Also, on January 31, the CBN issued a circular on the Harmonisation of Reporting Requirements on Foreign Currency Exposures of Banks.’ The circular introduces a set of guidelines aimed at reducing the risks associated with these practices as the Central Bank believes some commercial banks hold long-term FX positions so they can profit from the volatile movements.
The CBN raised concerns over the growing trend of banks holding large foreign currency positions. “The Central Bank of Nigeria (CBN) has noted with concern the growth in foreign currency exposures of banks through their Net Open Position (NOP). This has created an incentive for banks to hold excess long foreign currency positions, which exposes banks to foreign exchange and other risks.”
The summary of the circular was an instruction to banks that they immediately bring down their long positions to zero percent and their short positions to 20 percent of SHF.
Also, the CBN’s action will bring immediate liquidity to the market as it is estimated that between $6 and $7 billion is kept by banks in Long Positions but now, banks will have to immediately provide that liquidity to customers to bring their NOP within the prescribed limits.
Lastly, to liberalise the FX market, the CBN issued a circular that focused on Removal of Allowable Limit of Exchange Rate Quoted by International Money Transfer Operators (IMTOs).
Before now, experts say there was a +/- 2.5 percent on the NAFEX rate in which they are allowed to deal. That limit has now been removed, according to the latest circular signed by the CBN’s Director of Trade and Exchange, Hassan Mahmud, IMTOs are now granted the flexibility to quote exchange rates for naira payout to beneficiaries based on the prevailing market rates of willing buyer and willing seller principle.
However, the implication is that diaspora remittances in Nigeria estimated at around $25 billion yearly that went down to almost $0 in 2023 would rebound.
This is because, the FX flows were just not coming into Nigeria and USD/NGN was been converted by IMTOs but the USD remained offshore and never inflowed into Nigeria and part of the reason remittance flows weren’t coming into the country was because the margins were capped at +/-2.5 percent, which made the IMTOs resort to settling offshore instead of bringing the liquidity in.
With this new circular, IMTOs will be expected to inflow their USD as there is no excuse why they should not.
Above all, the circulars are expected to improve the efficiency, flexibility of foreign exchange transactions and in the long run, stabilise the Nigerian local currency as it will achieve its fair value.
Abiola Yusuf, a financial analyst, writes from Lagos.
