Between 2023 -2024, Nigeria experienced extreme exchange rate volatility with unprecedented erosions of Naira values against foreign currencies particularly, the US Dollar, GBP Sterling and the Euro.
At the commencement of the term of the current government in May 2023, a floating exchange rate regime was introduced allowing market forces to determine the value of the Naira. The intentions were very well placed in view of the prevailing regime of multiple exchange rates in the previous government from 2015 – 2023.
Under the previous government, unbridled foreign borrowing and a multiple exchange rate regime resulted in the erosion of foreign and domestic investor confidence. Huge gaps had arisen between the official and unofficial rates causing severe shortages of foreign exchange. This, coupled with the effect of COVID, signaled a dysfunctional economy.
In May 2023, at the inception of the current floating exchange rate regime, the exchange rate was N460.70 – $1.
The unified multiple exchange rate window was established to enhance efficiency in the FX market but initially, the rates significantly unraveled, dropping to N 1390.00 – $ 1 in May 2024 and then to an all time low at N 1,738.74 – $ 1 in November 2024 with the inflation rate at 34.8%.
Heavy speculation between unlicensed persons in Naira and hard currencies resulted in unprecedented volatility and erosions in Naira values in turn causing major dislocations to domestic and foreign commerce in a still heavily import dependent economy.
The situation was compounded by other factors including the removal by the Federal Government of fuel subsidies in 2023 and the prevalence of large volumes of Naira in circulation through monetary policies of the previous regime.
Attempts to Stabilise Exchange Rates
Significant attempts to stabilise the Naira and improve foreign exchange liquidity have been made. They include; most significantly, the clearing of the vast overhang of Nigeria’s due dollar obligations of approximately $7 billion. The clearing of the vast forward payment of $6.8 billion for Naira. The successful clearing of the aforementioned have given foreign investors comfort and confidence by easing prolonged pressure on the Naira, continually burdened by speculative demand for the dollar.
There have also been oversight and regulatory and policy interventions by the CBN in the Official Market through a series of guidelines, such as the Central Bank of Nigeria’s (CBN) order to Banks to sell their excess dollar stock and maintain certain levels of prudential thresholds.
Another key measure was the introduction in February 2024 of a new policy restricting international oil companies (IOCs) from repatriating 100 percent of their foreign exchange proceeds abroad immediately, limiting them to only 50 percent of their proceeds immediately while the other 50 percent will be repatriated 90 days from the day of inflow.
Additionally, measures have also been taken to prevent foreign currency racketeering, foreign exchange rate manipulation, money laundering and the financing of terrorism by stopping the proliferation of unregulated transactions through robust monitoring a number of Bureaux De Changes (BDC), under the regulatory guidelines titled “REVISED REGULATORY AND SUPERVISORY GUIDELINES FOR BUREAU DE CHANGE OPERATIONS IN NIGERIA.”
The aforementioned cluster of measures individually and cumulatively laid the foundation for the stabilisation of the foreign exchange market.
Electronic Foreign Exchange Matching System (EFEMS)
The EFEMS initiative, which was officially introduced on October 3, 2024, represents the boldest and most far reaching move by the CBN to address longstanding issues of speculation and lack of transparency in the foreign exchange market. It encourages compliance with all rules that pertain to making the foreign exchange market open and transparent to investors. After a test run in October-November 2024, it became fully operational in December 2024.
EFEMS requires all foreign exchange transactions to be conducted through this platform and therefore enables real-time order matching among banks and ensuring supply-demand data is openly available.
The objective of EFEMS is to reduce speculative activities and eliminate market distortions, allowing the CBN to exercise regulatory oversight and effectively regulate the FX market.
The CBN also launched the Nigerian Foreign Exchange (FX) Code, a comprehensive guideline aimed at ensuring transparency, integrity, and accountability among Authorised Dealers.
The FX Code introduces six core principles: Ethics, Governance, Execution, Information Sharing, Risk Management and Compliance, and Confirmation and Settlement Process.
The code supports the overall objective of EFEMS by mandating banks to show their real-time quotes and matching orders and promoting a fair and robust FX market, leading to more transparency and efficiency.
The CBN Governor recently stressed that the reforms of 2023-2024 have yielded tangible results with remittances through International Money Transfer Operators (IMTOS) rising 79.4 per cent in the first three quarters of 2024 to $4.18 billion, compared to $2.33 billion in the same period of 2023.
The positive effects of the foregoing basket of measures have been reflected in Nigeria’s external reserve, which grew by 12.74 per cent, reaching US$40.68 billion at the end of 2024.
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