CBN AND FRESH INITIATIVES TO INCREASE FX SUPPLY

Following optimistic feelings and restored confidence brought on by the new steps announced by the Central Bank of Nigeria, CBN to increase foreign exchange inflow into the country, the nation's financial markets erupted last week.

As the market capitalization, or the value of all shares listed on the NGXchange, increased by N998 billion to N32.662 trillion on Wednesday, the day the measures were announced, the stock market experienced historic gains.

Within a week of the new measures, the official forex market's Investors and Exporters, or I&E window, exchange rate had converged with the parallel market exchange rate of approximately N756 per dollar due to increased transactions that the new policies had sparked.

PRESIDENT'S STATEMENT

The CBN's actions were largely motivated by President Bola Tinubu's statement that the CBN must strive toward a single exchange rate and were intended to breathe new life into the formal forex market, represented by the Investor and Exporters, or I&E window.

The Central Bank should strive for a single exchange rate. The President stated in his address that this will divert money from arbitrage and toward significant investments in the infrastructure, machinery, and jobs that drive the real economy.

As a result, the CBN announced “Operational Changes to the Foreign Exchange Market” in a circular signed by Director, Financial Markets, Dr. Angela Sere-Ejembi.

“Abolishment of segmentation,” reads one Official Forex window. Currently, the Investors and Exporters (I&E) pane contains all segments. The CBN stated that deposit money banks will continue to handle applications for medicals, school fees, business travel allowance/personal travel allowance, BTA/PTA, and small and medium enterprises, or SMEs.

As a result, only the I&E window will be used for all market-based qualified FX transactions; all other windows are no longer in operation.

WILLING SELLER AND WILLING BUYER

Also stated by the CBN was the “Re-introduction of the Willing Buyer, Willing Seller” paradigm at the I&E Window. Foreign exchange is available during this window for all qualified transactions.

A willing buyer, willing seller system governs the I & E market, in which a party in need of foreign exchange looks for a party in possession of foreign exchange that it can purchase at a predetermined price through an authorized dealer.

The concept of a willing buyer, willing seller system implies that both parties have mutually agreed upon exchange prices.

TRANSACTIONS RELATED TO GOVERNMENT

The weighted average rate of the previous day's conducted transactions at the I&E window, calculated to two (2) decimal places, must be the operational rate for all government-related transactions, according to the apex bank.

Transactions involving Ministries, Departments, and Agencies (MDAs) are considered government-related transactions.

Regarding the weighted average rate and how it will be determined to two decimal places, the CBN stated, “This is a summation of the volume of FX traded multiplied by the various rates at which the deals are consummated, divided by total volume of trade.”

In response to questions about how, under the new regulations, end-users of foreign exchange will access the currency for BTA/PTA, medical expenses, and educational costs, the CBN stated: “PTA, BTA, and other invisible transactions continue to be accessed through the banks at the prevailing market rate.”

Additionally, it stated that The application process has not changed. All applications must go through banks, and there are no changes to the documentation required.

TWO-WAY QUOTE BASED ON ORDER

“Re-introduction of order-based two-way quotes, with bid-ask spread of N1,” is another one of the new initiatives. A Central Counter Party (CCP) must clear every transaction. Reintroduction of the Order Book will guarantee order transparency and smooth trade execution.

“Trade operations shall be conducted from 9 a.m. to 4 p.m., Nigerian time.”

The Order-Based Two-Way Quote, according to the CBN, is a form of two-way quote trading in which all transactions are trade-backed.

The apex bank explained how the order book will guarantee order transparency and smooth transactions, saying: “The order book is an electronic trading system where demand can be matched to supply on any given trading day and is visible to the entire market.”

OTHER ACTIONS

“Prohibition of trading limits on oversold FX positions with permission to hedge short positions with Over-The-Counter futures,” is one of the additional measures announced by the CBN. Overbought position limits shall be zero.

A special meeting of the Bankers' Committee was conducted on Friday, June 16, 2023, to examine the implementation of new rules in the foreign exchange market that were announced in a news release by the Central Bank of Nigeria (CBN) on June 14, 2023.

In order to increase FX supply, reduce speculation, boost consumer confidence, and ensure overall market stability, these policy reforms aim to foster transparency, liquidity, and price discovery in the FX market.