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Abstract:The forex market in Nigeria was at best unstable prior to the recent policy move by the current administration to establish a single foreign exchange rate window. Small firms and manufacturers utilized a different rate known as the investors and exporters (I&E) window, the government had a distinct rate known as the official window, the airlines had their own, and individuals could obtain FX at various rates depending on their needs.
The forex market in Nigeria was at best unstable prior to the recent policy move by the current administration to establish a single foreign exchange rate window. Small firms and manufacturers utilized a different rate known as the investors and exporters (I&E) window, the government had a distinct rate known as the official window, the airlines had their own, and individuals could obtain FX at various rates depending on their needs.
Even worse, rationing prevented individuals with the means to purchase the foreign exchange they required. The ability to transact at one's desired rate was denied to those who possessed foreign exchange to sell.
All of them combined to create a confused economy. The back then FX structure discouraged both domestic and foreign investors from contributing to Nigeria's development. FX posed substantial unpredictability, which significantly restricted company operations.
Investors who were interested in entering the nation either stayed away or made investments in other areas. Projects that required FX had to be postponed or abandoned as a result. The loss of Nigeria's appeal as an investment location hurt those looking for international partners. For the average person, this meant that neither the hospitals needed for accessing care nor the employment that should have been produced were established.
The previous order also gave rise to the possibility of an endless rise in the FX rate, especially in the black/parallel market, which was primarily brought on by FX round-tripping.
FX round-tripping is when clients transfer foreign currency they have gotten from the CBN at an official rate to the illegal market in order to make more money. Due to the practice, foreign exchange was unavailable to consumers even for the most fundamental operations, thus creating a scarcity of FX. In fact, the gap between the official and parallel markets led to a 63 percent black market premium for arbitrageurs, which resulted in a monthly FX subsidy cost to the government of around $329 million.
That explains why both domestic and foreign investors applauded enthusiastically when the announcement of the exchange rate unification was made.
In reality, a rise in investor confidence has led to large advances in Nigerian stocks and Eurobonds. There is also a further hope that the nation's investment profile and creditworthiness will strengthen.
It only took a straightforward announcement that FX dealers are free to negotiate transactions at their own discretion and that end-users should conduct business at the same exchange rate.
According to information compiled from the 2023 half-year financial statements released by the banks, Nigerian commercial banks reported that they had recorded significant foreign exchange revaluation profits estimated at N1.7 trillion in the first half of 2023 within just about three months of the introduction of the FX unification policy.
The devaluation of the Naira, which reached N769.25/$1 in June 2023 as opposed to its 2022 closing rate of N461.50/$1, is to blame for the sharp increase in FX revaluation gains.
According to experts, Nigeria's economic recovery may be aided by the new policy toward a communal and open foreign exchange system, which is already making it easier for people and businesses to use financial services.
Customers of deposit money banks (DMBs) have immediately embraced the efforts offered by the banks, which aim to provide smooth and convenient foreign exchange services, as a result of the unification of the forex rates.
Customers can now save time and hassle by converting FX to naira through online banking platforms instead of having to withdraw cash or use the black market for currency conversion. This development indicates both the government's dedication to establishing a transparent and effective FX market and the growing confidence in the single exchange rate system.
In order to better serve their consumers, Nigerian banks are also using inventive solutions. The FX Cash Backed Loan, which allows holders of domiciliary accounts to acquire naira loans of up to 85% of their available FX balance, is one noteworthy product. Individuals can use this financial instrument to cover their immediate financial demands without having to remove or use their foreign exchange assets. Customers can easily acquire funds to support their personal and professional goals by using their FX holdings as security.
One of the banks has lifted the ban on foreign transactions using naira cards, giving people more freedom to carry out cross-border transactions. With the removal of the former restrictions that complicated international financial transactions, this improvement enables cardholders to make payments and purchases internationally with ease.
An important step toward bringing Nigeria's financial system into compliance with international norms and facilitating global trade and commerce is the restoration of international transaction capabilities.
Nigeria's dollar-denominated sovereign bonds have risen significantly, mirroring the market's upbeat mood. The price of the nation's Eurobonds has increased as a result of the FX regulations announcement, with certain issues reaching their highest values in months. The maturity of the issue in 2033 increased by 2.4 cents to 78.625 cents, the highest price in more than five months.
It is important to note that Nigeria has had acute dollar shortages, which have prompted many people to go for foreign currency on the black market. By encouraging openness, reducing reliance on the black market, and bringing the value of the naira into line with its official exchange rate, the foreign exchange unification policy's implementation seeks to alleviate these shortages. These initiatives will help create a foreign exchange market that is more efficient and stable, giving people and businesses better security and access to FX.
The FX unification strategy, according to economists, is a crucial step in the nation's effort to resume its economic recovery. The market will grow more competitive, according to Subomi Plumptre, chief executive officer of Volition Cap.
“It is anticipated that increased competition among International Money Transfer Operators (IMTOs) will result from customers being able to convert dollars to naira on online banking platforms,” she said. The public may benefit from cheaper transaction costs and better rates as a result of this stoking innovation.
Disclaimer:
The views in this article only represent the author's personal views, and do not constitute investment advice on this platform. This platform does not guarantee the accuracy, completeness and timeliness of the information in the article, and will not be liable for any loss caused by the use of or reliance on the information in the article.
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