Boosting Foreign Exchange Liquidity To Rescue Naira

Last week, the Central Bank of Nigeria (CBN) introduced significant measures to improve foreign exchange (forex) liquidity by allowing eligible International Money Transfer Operators (IMTOs) access to naira liquidity at the official window.

This initiative, outlined in a circular issued on Monday, is part of a broader strategy to enhance the settlement of diaspora remittances and ensure the smooth functioning of forex markets. The new policy permits IMTOs to access the central bank’s window either directly or through Authorised Dealer Banks (ADBs) for forex transactions.

These operators, who facilitate cross-border money transfers, can now take a more active role in Nigeria’s forex market. The move aims to improve local currency liquidity and boost remittance flows through formal channels. “The bank has implemented measures that will enable eligible International Money Transfer Operators (IMTOs) to access NGN liquidity at the CBN window.

These measures are aimed at widening access to local currency liquidity for the settlement of diaspora remittances,” the CBN stated.

Previously, IMTOs were not major players in Nigeria’s forex market, which mainly involved the CBN, authorized dealers (licensed financial institutions), and clients (retail or corporate entities). This policy shift is designed to integrate IMTOs into the forex market, enhancing liquidity and market stability. To ensure compliance and effective operation, the CBN has established guidelines for “same day settlement” for transactions executed before 12 noon on a trading date.

The pricing on the CBN portal will reflect NAFEX traded rates, observable on an acceptable market benchmark. Additionally, regulatory returns from all participants are mandatory and must include detailed information on the sources of funds.

The circular took immediate effect, with authorised dealers and the CBN overseeing transactions involving IMTOs. Earlier this year, the CBN had mandated IMTOs to make naira payments to recipients in Nigeria, removing limits on forex rates for such transactions. This policy aimed to enhance transparency and competitiveness in the forex market.

CBN governor, Dr. Olayemi Cardoso highlighted the significance of remittance flows, which account for about six per cent of Nigeria’s GDP. During the last Monetary Policy Committee (MPC) meeting, he emphasised the importance of a strategy to engage the IMTO sector, saying, “We have identified, of course, this is a very critical element of the inflows coming into the country. It is estimated to represent about 6 percent of our GDP. And so, we felt that it was important from the central bank perspective to have a strategy to engage this sector.”

Cardoso detailed efforts to engage IMTOs through virtual meetings and in-person discussions during World Bank and IMF meetings. These engagements aimed to address challenges faced by IMTOs, particularly regarding pricing, commissions, and exchange rates.

The CBN’s strategy includes establishing a task force, reporting directly to governor, Cardoso, to ensure progress in doubling remittance flows within a year. Recently, the CBN granted approval in principle (AIP) to 14 new IMTOs, fostering competition and aiming to reduce transaction costs.

On April 20, Cardoso stated that the financial regulator has been collaborating with the IMTOs to collectively commit to doubling remittance flows through formal channels into Nigeria. This initiative reflects the CBN’s commitment to leveraging technology and refining regulations to boost forex liquidity and strengthen Nigeria’s economy through increased remittance flows.

Meanwhile the country’s external reserves grew for the fourth consecutive week, as the gross reserves level increased further by $42.47 million week on week to $34.14 billion as at June 27, 2024, attributable to increased oil earnings and a possible receipt of a part of the IMF’s Development Policy Financing (DPF) loan.

Conversely, the naira depreciated by 1.3 per cent during the week to N1,505.30 to the dollar at the Nigerian Autonomous Foreign Exchange Market (NAFEM) where trades were consummated within the N1,4110 and N1,577 to the dollar band.

In the forwards market, the naira depreciated across the 1-month (-1.0% to NGN1,521.26/USD), 3-month (-1.8% to NGN1,577.88/USD), 6-month (-1.9% to NGN1,652.47/USD) and 1-year (-2.4% to NGN1,811.77/USD) contracts.

Analysts point out that the frail liquidity in the forex market underpinned the increased volatility on the naira as interventions by the CBN remain muted, together with weak offshore participation. In the short term, the naira is expected to remain under pressure, barring any significant forex interventions from the CBN.