Nigeria moves to boost FX liquidity

The Central Bank of Nigeria has recently announced new measures to boost foreign exchange (FX) liquidity in the country. In a bid to improve efficiencies around International Money Transfer operations, the apex bank has allowed International Money Transfer Operators (IMTOs) and authorized dealer banks to access the country's official foreign exchange windows. Kingsley Nwaiwu, Head of Consumer sector sales at Stanbic IBTC, shed light on these developments during a recent interview on CNBC Africa. The move is aimed at facilitating diaspora remittances for Nigerians living abroad who need to make payments to their loved ones back home. Typically, IMTOs aggregate these funds and bring them to Nigeria for sale on a willing buyer, willing seller basis. The central bank's decision ensures that these funds pass through the Nigerian autonomous foreign exchange market, known as the AFM window. One of the key issues addressed by the central bank is the Naira settling process, as some IMTOs have faced challenges with same-day settlements. To counter this, the central bank will now step in and buy the foreign currency if the bank is unable to settle on the same day, facilitating timely payments to beneficiaries in Nigeria. According to World Bank records, IMTOs transacted about $19 billion in 2023, but industry experts believe this figure could be higher if the flows are directed through the official window. With more reliable data on these transactions, it is estimated that volumes could reach $20-25 billion annually. This influx of funds via the official window is expected to boost liquidity in the FX market, potentially strengthening the Naira against the dollar. Kingsley Nwaiwu also highlighted the impact of these reforms on the value of the Naira. Supply-driven issues have historically influenced the USD/NGN exchange rate, and an increase in supply could lead to Naira appreciation. Previous instances of Naira strengthening have been observed when there was a surge in foreign portfolio investments, demonstrating the link between supply and currency value. When discussing the overall strength of the FX reforms, Nwaiwu commended the central bank for its efforts in driving price stability. The recent changes in the FX market methodology, along with the liberalization and consolidation of various segments, have led to a more transparent and market-driven FX trading system. By eliminating interventionist segments with discounted rates, the central bank aims to establish a fair value for the Naira. Currently, the currency is hovering between 1.4 and 1.5 levels, with recent interventions by the central bank to maintain stability. In conclusion, the new measures introduced by the Central Bank of Nigeria signify a step towards enhancing FX liquidity and improving the remittance process for Nigerians. By opening up access to the official foreign exchange windows for IMTOs and authorized dealer banks, the central bank aims to streamline operations and foster a more robust FX market. These reforms are expected to not only increase liquidity but also potentially lead to Naira appreciation against the dollar, bringing more stability and predictability to the FX market.