Naira Appreciates As CBN Begins Electronic Forex Market Implementation

The value of the naira appreciated by nearly N100 and over five per cent in the course of the just ended week as speculators are wary of which way the value of the currency will go in the wake of the full commencement of the Electronic Foreign Exchange Market System (EFEMS).

The Central Bank of Nigeria (CBN) had recently launched the EFEMS as part of efforts at curbing speculation as well as eliminating price distortions in the foreign exchange market. The new system became effective last week.

In the same week, the value of the naira which had remained relatively stable between N1,700 and N1,650 to the dollar appreciated significantly on the streets as traders said demand for the greenback had declined.

At the end of trading activities on Friday, traders at the parallel market quoted the value of the naira at around N1,591 to the dollar as against N1,700 which was quoted earlier in the week. At the official end of the market, the naira was quoted at N1,535 to the dollar although intra-day deals saw the local currency sell as low as N1,700 and as high as N1,480 to the dollar.

Traders at the official end of the market opine that the need to comply with the new market rules may be ensuring transparency in the market as many are wary and do not want to be on the receiving end of erring.

According to the CBN, all foreign exchange transactions in the interbank foreign exchange market are to be conducted on the EFEMS where transactions will be reflected immediately. “The new system is expected to enhance governance, transparency and facilitate a market- driven exchange rate that will be accessible to the public.

This development is expected to reduce speculative activities, eliminate market distortions and give the CBN improved oversight capabilities to effectively regulate the market.

“The CBN will publish real time prices and buy/sell orders data from the system, and in collaboration with the Financial Markets Dealers Association (FMDA), publish the rules for the EFEMS. The Nigerian FX Code and revised Market Operating Guidelines for the Nigeria Foreign Exchange Market will also provide guidance to market participants.” The CBN guideline stated.

The EFEMS essentially consolidates all previous official foreign exchange windows into one unified system. This replaces the fragmented structure of multiple windows, such as the Investors and Exporters (I&E) Window, the SME Window, and the Invisible Window.

The new system also mandates a minimum trade value of $100,000 for all interbank forex transactions, which seems to have curtailed speculative activities in the market. Unlike the previous opaque system, the current system is order-based, similar to the way stocks are traded on the NGX.

For example, bids (buying requests) are displayed on the system along with their bid prices, while offers (selling requests) are also shown with their corresponding prices. This makes it easier to determine how much forex is available in the market and the prevailing prices.

The CBN’s guidelines had also required that Authorized Dealers must report forex transactions to the CBN within 10 minutes via an API-based system. Similarly, BDCs are required to submit daily activity reports through automated portals, while Commercial and Merchant Banks must adopt real-time reporting to enhance monitoring and oversight.

While the BDC segment, which had previously been excluded from certain forex market activities, is now positioned to play a more active role in meeting retail forex demand, players in the market say they cannot be part of it until they meet the new capital base.

President of the Association of Bureau De Change Operators of Nigeria (ABCON), Aminu Gwadabe had told newsmen that “We received the news with mixed reactions. While it is intended to increase liquidity at the retail end of the forex market, it is contingent on meeting the new recapitalization requirements of either N500 million or N2 billion as stated in the May guidelines. However, it does not specifically permit all currently licensed BDCs to purchase foreign exchange from the interbank market.”

“It is tied and subject to meeting the new capitalisation guidelines introduced by the CBN in May 2024. This also addresses questions about the sources of funds under the new BDC guidelines raised by many applicants. It is not automatic but conditional on meeting these new requirements.”