Olayemi Cardoso: Boosting Forex Market Liquidity, Promoting Price Discovery
Joseph Coker
The Central Bank of Nigeria (CBN) under the leadership of Mr. Olayemi Cardoso, has embarked on a series of reforms aimed at easing access to foreign exchange (FX) and stabilising the naira. These measures, which have been implemented over the past few months, represent a significant shift towards a market-driven exchange rate regime.
No doubt, Cardoso’s tenure has been marked by significant economic challenges, including an FX liquidity crisis exacerbated by limited dollar inflows and a volatile naira. The CBN’s recent reforms are part of a broader strategy to restore confidence in the naira and stabilise the economy.
Following a period of severe depreciation, where the naira fell to record lows, these measures have led to a temporary recovery for the naira exchange rate against the United States dollar.
For instance, the CBN during the week sold dollars to end users through a Retail Dutch Auction System (rDAS) as part of efforts to reduce the demand pressure market, and promote price discovery. The central bank disclosed that during the auction, total bid valued at $1.18 billion was received from 32 Authorised Dealers Banks (ADBs), of which $876.26 million from 26 banks qualified at a cut off rate of N1495/$.
The apex bank also revealed that bids from six banks valued at $313.69 million were disqualified. The result of the retail FX sale to end users through rDAS, was communicated via a circular dated August 6, 2024, signed by CBN Director, Financial Markets Department, Dr. Omolara Omotunde Duke.
The intervention at the rDAS was in line with the objective of the central bank to boost liquidity in the market as well as promote price discovery. It also aimed to mitigate the increasing demand pressure in the FX market and stabilise the naira exchange rate, which has been the focus of Cardoso since he assumed office.
The central bank further revealed that it took the measure because it observed a significant rise in unmet FX demands from end users with banks, which had exacerbated the pressure on the FX market and adversely impacted the naira’s exchange rate.
“The CBN has noted growing unmet FX demand from end users with banks. This has continued to increase the demand pressure in the FX market with adverse impact of the exchange rate of the Naira”, it noted.
The rDAS complements the two-way quote system deployed over the past few months to enhance liquidity in the interbank market, through which over $305 million of FX has been sold to authorised dealers in the last three weeks.
Today, the CBN’s policy objectives are yielding tangible results and bolstering market confidence as net FX flows in the country rose to $25.4 billion between January and June, marking a 55 per cent year-over-year increase. This growth was driven by a rise in capital importation, which reached $6 billion in June 2024, and record inflows from diaspora remittances through formal channels.
Cardoso had set an ambitious target to double the remittance flows into Nigeria within a year. This goal reflects the CBN’s strategic focus on enhancing the formal channels through which remittances are processed, thereby increasing the liquidity of the local currency.
Today, the FX market is also showing signs of improvement and increased depth, with more robust and diversified sources of liquidity contributing to the sustained convergence of exchange rates across all segments of the market.
The official market recorded a turnover of $43 billion in customer transactions by the end of July 2024, with CBN-supplied liquidity representing less than 5 per cent of total market activities.
The CBN under Cardoso remains steadfast in its commitment to fostering a transparent, market-driven foreign exchange market, and it will continue to strengthen the market’s capacity to meet the needs of all legitimate participants.
Cardoso, strongly believes that sound monetary and fiscal policies play a pivotal role in facilitating intra-Africa trade and catalysing sustainable economic growth across the continent.
He recently revealed that in the past few months, the apex bank had embarked upon bold reforms to return to the path of monetary policy orthodoxy as well as remove observed distortions in the foreign exchange market.
He said, “Our efforts have brought some significant outcomes as volatility in the foreign exchange market has reduced measurably and our inflows have also increased significantly. Interbank market activities have deepened while rates have begun to converge around the standing facilities band.
“While challenges remain, the direction of travel is clearly positive. The challenges in the operating environment present significant hurdles. It is crucial that monetary and fiscal policies provide robust responses to mitigate the risks of rising inflation and the lingering effects of adverse supply shocks, which have significantly impacted our economies.”
To Cardoso, one of the ways of addressing the perennial pressure in the forex market is for Nigerians to cut their appetite for foreign goods and services.
“We must moderate our demands for forex. Where there are opportunities to substitute locally, so we should.” the CBN governor. He had also advised the federal government to look into improving the educational and medical sectors as a means of dissuading people from travelling outside the country to get better services
“The total quantum for education and medical is more than our external reserves. If we can up our game on education, and medicals, there won’t be the need for our people to go abroad.” The continual scramble for the dollar by Nigerians to pay tuition fees as well as medical and import bills has continued to pile pressure on the naira.
“We are working very hard to bring back credibility to the CBN and many of the investors who over the years have considered the environment inimical, we don’t have to beg them,” he said.
“If we are doing the right thing, investors will come. For them to come, they have to believe that you will do the right things. I also want to say that in establishing credibility, there are certain things that we need to do,” he added.
Also, as part of measures to improve access to forex, Cardoso introduced the willing buyer-willing seller model in the FX market, which allows market forces to determine the exchange rate, rather than the CBN. This has also contributed to the efficiency in the market and has help in attracting more foreign investment.
Additionally, the central bank has also removed restrictions on forex for a number of items, increasing access for businesses and individuals.
The CBN has also granted eligible International Monetary Transfer Operators (IMTOs) direct access to naira liquidity at the official market. This policy allows these operators to execute FX transactions more efficiently, facilitating smoother remittance processes. Under this arrangement, transactions initiated before noon would be settled on the same day, enhancing operational efficiency.
The IMTOs are required to submit daily regulatory returns to the CBN, detailing the sources of funds. This measure is designed to promote transparency and compliance within the FX market, which has faced scrutiny for its previous lack of oversight. Also, the pricing for transactions conducted through the CBN portal would reflect the Nigerian Autonomous Foreign Exchange (NAFEX) rates, ensuring that rates are competitive and based on market benchmarks. This approach also aims to stabilise the naira and improve price discovery in the FX market.
While these reforms are steps in the right direction, the CBN still faces significant challenges. The persistent scarcity of FX, driven by low FX earnings and high import demand, continues to put pressure on the naira. Additionally, the volatility in the FX market can create uncertainty for businesses and investors.
In conclusion, Cardoso’s initiatives to improve access to FX in Nigeria are critical in addressing the liquidity crisis and enhancing the efficiency of remittance flows. While these measures have the potential to stabilise the naira and restore investor confidence, the CBN must navigate the complexities of the FX market and address the underlying issues that have historically plagued Nigeria’s monetary policy framework.
Looking ahead, the success of the CBN’s reforms will depend on several factors, including the ability to attract more foreign investment, increase non-oil exports, and improve the overall macroeconomic environment. While challenges remain, the move towards a market-driven exchange rate is a necessary step towards a more stable and efficient FX market.
