Nigeria’s FX Unification: Restoring Sanity in Chaotic Market

Stephen Ugwu

Before the recent policy decision by the present administration to create a single foreign exchange rate window in Nigeria, the forex market in the country could best be described as chaotic. The government had a separate exchange rate, described as the official window; the airlines had theirs; small businesses and manufacturers used a different rate known as investors and exporters (I&E) window; and individuals could access FX at different rates based on the purpose.

Even worse, those who had the capacity to buy the FX they needed could not due to rationing. Those who had the FX to sell were not allowed to do business at their preferred rate.

The result of all these was an economy in confusion. The then FX framework prevented both foreign and domestic investors from investing to develop Nigeria. There was serious uncertainty around FX, a big limitation in doing business.

Investors who were looking to come into the country either stayed on the sidelines or invested in other markets. It meant that those who needed FX for projects had to delay or cancel them. Those looking for foreign partners suffered as Nigeria became less attractive as an investment destination. For everyday people, it meant that the jobs that should have been created were not available and the hospitals to access care were not built.

The old order also created opportunity for an unending increase in the FX rate, particularly in the black/parallel market, caused mainly by FX round-tripping.

FX round-tripping is a situation where customers divert foreign exchange obtained from the CBN at an official rate to the black market for higher profits. The practice had created artificial FX scarcity and had denied users of foreign exchange even in their most basic transactions. In fact, the difference between official and parallel markets created a 63 percent black market premium for arbitrageurs that cost the government about $329 million every month in FX subsidy.

That explains the loud ovation that greeted the announcement of the unification of the exchange rate from both foreign and domestic investors.

In fact, Nigerian stocks and Eurobonds have recorded significant gains due to a boost to investor confidence. There is also a further expectation that the creditworthiness and investment profile of the country will improve.

All it took was a simple declaration that end-users should do business at the same exchange rate and FX dealers are free to negotiate deals without restrictions.

Within just about three months of the introduction of the FX unification policy, Nigerian commercial banks reported that they have recorded significant Foreign exchange revaluation profits estimated at N1.7 trillion in the first half of 2023, according to data collated from the 2023 half-year financial statements released by the banks.

The surge in FX revaluation gains can be attributed to the devaluation of the Naira, which reached N769.25/$1 in June 2023, compared to its 2022 closing rate of N461.50/$1.

Experts believe the new policy toward a collective and transparent foreign exchange system, and which is already enabling individuals and businesses to access financial services more efficiently, could contribute to Nigeria’s economic recovery.

With the unification of the forex rates, customers of deposit money banks (DMBs), have quickly embraced the initiatives introduced by the banks, which aim to provide seamless and convenient foreign exchange services.

With the option to convert FX to naira through online banking platforms, customers can now avoid the hassle of withdrawing cash and resorting to the parallel market for currency exchange. This shift reflects the increased confidence in the unified exchange rate system and the government’s commitment to creating a transparent and efficient FX market.

Nigerian banks are also becoming more creative, introducing innovative solutions to better serve their customers. One notable offering is the FX Cash Backed Loan, which enables domiciliary account holders to access naira loans of up to 85 percent of their available FX balance. This financial product allows individuals to meet their immediate financial needs without the requirement to withdraw or spend their FX holdings. By leveraging their FX assets as collateral, customers can access funds conveniently, supporting their personal and business objectives.

The suspension of international transactions on naira cards has been lifted by one of the banks, offering individuals greater flexibility in conducting cross-border transactions. This development allows cardholders to make international payments and purchases seamlessly, eliminating the previous limitations that hindered international financial interactions.

The restoration of international transaction capabilities represents a significant step toward aligning Nigeria’s financial system with global standards and facilitating international trade and commerce.

Nigeria’s dollar-denominated sovereign bonds have experienced notable gains, reflecting the market’s positive sentiment. The announcement of the FX rules has resulted in an increase in the price of the country’s Eurobonds, with some issues reaching their highest prices in months. Issuance matured in 2033 up 2.4 cents to 78.625 cents, the highest in over five months.

It is worth noting that Nigeria has been grappling with severe dollar shortages, which have led many individuals to seek foreign currency in the parallel market. The implementation of the foreign exchange unification policy aims to address these shortages by promoting transparency, reducing the reliance on the parallel market, and aligning the naira’s value with its official exchange rate. These efforts will contribute to a more stable and efficient foreign exchange market, providing individuals and businesses with greater certainty and access to FX.

Economists believe that the FX unification policy is a significant milestone in the country’s quest for economic recovery. According to the Chief Executive Officer of Volition Cap, Subomi Plumptre, the market is going to become more competitive.

“The fact that customers can now convert dollars to naira on online banking platforms is expected to drive competition among International Money Transfer Operators (IMTOs),” she said. “This could spark innovation leading to lower transaction fees and better rates for the public. The FX Cash Backed Loan, which offers naira loans to foreign currency holders, serves as an example of how easing foreign exchange regulations can stimulate innovation among financial service providers due to competitive pressures.”

The Chief Executive Officer of the Centre for the Promotion of Private Enterprise (CPPE), Dr. Muda Yusuf, in a recent statement, said FX liberalisation  will unlock the huge potential for investment, jobs and capital flows, and investors’ confidence would be positively impacted.

According to him, “A unified exchange rate regime will enhance liquidity in the foreign exchange market, reducing uncertainty, enhancing the confidence of investors, and showing more transparency as a mechanism for forex allocation.”

He said it minimizes discretion in the allocation of forex and reduces corruption vulnerabilities, while also reducing opportunities for round tripping and other sharp practices.

Another economist, Kelvin Emmanuel said the decision to book independent revenues from government-owned enterprises, at investors and exporters rates, its decision to have the CBN create non-deliverable forwards for short- and long-term foreign investors is leading to appreciation of bond yield curve and bringing investors back into both the capital markets and the real economy. He also believes that these reforms will contribute to economic reflation and long-term growth.

The new policy is not coming without its own challenges. For instance, there has been a spike in the prices of goods and services due to inflationary pressures, but there is a consensus among economists that this will ease off especially with proper monetary and fiscal policies.

Ugwu is a financial analyst based in Abuja