Nigeria's FX reforms improving market efficiency

Nigeria's foreign exchange market has experienced a positive impact from the FX reforms introduced by the Central Bank of Nigeria. Kingsley Nwaiwu, the Head of Consumer Sector Sales at Stanbic IBTC, spoke with CNBC Africa's Kenneth Igbomor to discuss the progress made in achieving market efficiency and transparency. Nwaiwu highlighted the success of the electronic foreign exchange matching system introduced in December 2024, which has significantly contributed to the appreciation of the Naira against the US dollar. The support provided by the Central Bank on this platform has led to a moderation in exchange rates and reduced speculative pressures on the Naira. The implementation of the system saw the Central Bank acting as a counterparty and providing liquidity support to the tune of $545 million in December and $525 million in January. This support facilitated the appreciation of the Naira from 1.670 levels to below 1.5, demonstrating a positive trend in the market. Despite a slight dip in March due to external factors such as falling crude oil prices, the Central Bank continued its intervention to stabilize the Naira, reaching a record of $834 million sold on the platform. Current rates stand at 1.545, showing signs of improvement compared to previous weeks. Nwaiwu emphasized the enhancement of market efficiency and transparency resulting from the reforms. He noted that the presence of unlicensed intermediaries had previously caused distortions in the FX market, but the introduction of the electronic matching system had addressed these issues. With the Central Bank playing a crucial role as a counterparty and supplier of FX, there has been a notable reduction in market distortions and increased efficiency. The discussion also touched on the actions of foreign portfolio investors (FBIs) in the Nigerian market. Nwaiwu explained that FBIs engage in carry trades by bringing US dollars to Nigeria to invest in high-yield interest rate instruments. The recent moderation in inflation numbers and the possibility of a rate cut by the Central Bank could impact the investment decisions of these players. Nwaiwu mentioned that maintaining high-interest rates may discourage investment but reducing them could spur economic growth by making borrowing more accessible for businesses. Diaspora remittances and inflows were highlighted as another key factor in supporting FX stability. Nwaiwu acknowledged the contribution of international money transfer operators in bringing funds to the Nigerian market. While these flows have helped stabilize the market, he expressed a desire to see more of these funds channeled through the official market to reflect market rates accurately. Despite improvements, speculative pressures are still a concern in the market. Nwaiwu acknowledged that while there has been a reduction in speculation compared to previous years, demand in the parallel market persists. The official market's exchange control requirements may drive some businesses to seek forex in the parallel market, leading to continued pressure. However, with ongoing support from the Central Bank and the efficiencies gained from the reforms, the Nigerian FX market is on a path towards stability and transparency.