Nigeria’s foreign exchange market has witnessed significant fluctuations since the recent announcement of the unification of all official exchange rate windows by the Central Bank of Nigeria. With a cumulative turnover of $788 million recorded in the official Investor & Exporter (I&E) window within a week of the announcement, traders are grappling with price discovery as market forces adapt to the new policy framework. This article explores the impact of the exchange rate unification, the ongoing process of market discovery, and the potential implications for Nigeria’s foreign exchange market.
Exchange Rate Oscillations:
Following the unification of the exchange rate, the exchange rate at the I&E window has oscillated between N663/$1 and N770/$1 as traders search for price discovery. On the first day of the announcement, the exchange rate fell by 29% to N664/$1. Subsequently, it dropped further to N702/$1 before closing the week slightly stronger at N664/$1. The volatility continued, with rates closing at N770.3/$1 on Monday and N756.6/$1 on Tuesday, June 20th. Notably, the official exchange rate achieved parity with the black-market rate for the first time since 2018, when it was around N363/$1.
Liquidity and Turnover:
While the Foreign Exchange (FX) turnover published by the FMDQ provides a proxy for liquidity in the I&E window, it does not represent the actual volume of forex bought and sold in general. However, it offers valuable insights into the level of liquidity. The cumulative turnover of $788 million within a week indicates significant activity in the I&E window, reflecting market participants’ engagement in foreign exchange transactions.
Market Adjustment and Price Discovery:
The market fluctuations and volatility can be attributed to the ongoing process of market discovery in response to the Central Bank of Nigeria’s efforts to enhance transparency and liquidity. As market forces adapt to the new policy framework, exchange rates experience fluctuations. However, this period of adjustment and volatility is expected to pave the way for a more stable and efficient foreign exchange market in the long run.
Effects on External Reserves:
A quick check at the central bank’s website reveals that Nigeria’s external reserves stood at around $34.49 billion, slightly lower than the $34.65 billion recorded on the day the exchange rate unification was announced. The fluctuations in the forex market and the ongoing adjustment process may have influenced the changes in the external reserves. It is crucial to monitor the impact of these fluctuations on Nigeria’s reserve levels as the market stabilizes.
CBN’s Guidance and Initiatives:
The Central Bank of Nigeria issued a press statement on June 18, 2023, providing further guidance to Deposit Money Banks (DMBs) on operational changes in the foreign exchange market. The guidance included allowing all visible and invisible transactions to be eligible for the I&E window, granting unrestricted access to funds in ordinary domiciliary accounts, and permitting cash deposits not exceeding $10,000 per day or its equivalent via telegraphic transfer. Additionally, the introduction of the eNaira as a payment option for recipients of diaspora remittances aims to enhance the liberalization of remittance payouts.
Expectations for Stability and Efficiency:
Although the current market volatility poses challenges, the unification of exchange rates and the Central Bank of Nigeria’s efforts to enhance transparency and liquidity are expected to contribute to a more stable and efficient foreign exchange market. As market forces adjust and price discovery takes place, participants will gain a better understanding of the true value of the naira against the dollar. This process will facilitate smoother transactions, attract foreign investments, and support Nigeria’s economic growth.
The unification of exchange rates in Nigeria’s foreign exchange market has brought about significant market fluctuations and volatility. Traders are engaged in the ongoing process of price discovery as they adapt to the new policy framework. While the market adjusts, it is essential to monitor the impact on liquidity, external reserves, and overall market stability. The Central Bank of Nigeria’s initiatives, including guidance to DMBs and the introduction of the eNaira, are steps towards enhancing transparency and liberalizing the forex market. As the market stabilizes, the expectation is for a more efficient and stable foreign exchange market that supports Nigeria’s economic growth and attracts foreign investments.