Tinubunomics: Nigerian stocks extends market gains following CBN forex unification

The Central Bank of Nigeria (CBN) has announced the unification of all segments of the forex market collapsing all windows into one.

This was part of a series of immediate changes to operations in the Nigerian Foreign Exchange (FX) Market, in a bid to improve liquidity and stability.

According to a press release signed by the Director of Financial Markets, Angela Sere-Ejembi, PhD, and dated 14 June 2023, the changes include:

1. Abolishing the segmentation of the FX market into different windows. All transactions will now be done through the Investors and Exporters (I&E) window, where the exchange rate will be determined by market forces. Applications for medicals, school fees, BTA/PTA, and SMEs would continue to be processed through deposit money banks.

• Previously, the FX market was divided into different windows, but now all transactions will be conducted through the Investors and Exporters (I&E) window. This means even those applying for BTA and PTA will also pay the official exchange rate at the I&E window. The exchange rate in this window will be determined by market forces. 

2. Reintroducing the “Willing Buyer, Willing Seller” model at the I&E window, where all eligible transactions can access foreign exchange at their preferred rates.

• Willing Buyer, Willing Seller model: The CBN is reintroducing this model at the I&E window. It means that eligible transactions can access foreign exchange at the rates they prefer.

3. Setting the operational rate for all government-related transactions at the weighted average rate of the previous day’s executed transactions at the I&E window, rounded to two decimal places.

• Operational rate for government-related transactions: The CBN will set the operational rate for transactions related to the government. This rate will be the weighted average rate of the previous day’s executed transactions at the I&E window, rounded to two decimal places.

4. Prohibiting trading limits on oversold FX positions and allowing hedging of short positions with OTC futures. Limits on overbought positions will be zero.

• This means trading limits on oversold FX positions will no longer be imposed, and short positions can be hedged with Over-The-Counter (OTC) futures. However, there will be zero limits on overbought positions.

5. Reintroducing order-based two-way quotes, with a bid-ask spread of N1. All transactions will be cleared by a Central Counter Party (CCP).

• Two-way quotes with a bid-ask spread of N1 will be reintroduced. This means there will be a fixed difference between the buying and selling prices. All transactions will be cleared by a Central Counter Party (CCP).

6. Reintroducing an Order Book to ensure transparency of orders and seamless execution of trades.

• An Order Book will be reintroduced to ensure transparency of orders and smooth execution of trades.

7. The CBN also announced the cessation of two schemes that were introduced to boost remittances and forex supply: the RT200 Rebate Scheme and the Naira4Dollar Remittance Scheme, effective from 30 June 2023.

• This means the scheme is now abolished! 

What this means

Based on the changes mentioned in the news, the exchange rate in the Nigerian Foreign Exchange (FX) Market will now be determined by market forces.

• Previously, there were different windows and a fixed exchange rate system in place. However, with the recent changes, the exchange rate will be determined through the Investors and Exporters (I&E) window, where transactions will be conducted.
• This implies a shift from a fixed exchange rate system to a floating exchange rate system.
• Under the new system, market forces such as supply and demand will play a significant role in determining the exchange rate.
• The rates at which eligible transactions can access foreign exchange will be based on the “Willing Buyer, Willing Seller” model, allowing participants to transact at their preferred rates within the I&E window.

Finally, the move towards a single window and the use of market forces to determine the exchange rate signifies a shift toward a more flexible and market-driven exchange rate system, which can bring about greater liquidity and stability in the Nigerian FX Market.

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