The Nigerian Foreign Exchange Market; Rate Determination; Control and Prospects for Naira Convertibility

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The Nigerian foreign exchange market; rate determination; control and prospects for Naira convertibility

Good morning members of the high table, my colleagues in the industry and all other distinguished guests. It is my greatest pleasure to present this paper at the Foreign Exchange seminar organized by the Chartered Institute of Bankers of Nigeria. I hope I am able to shed light on this extremely challenging topic.

Definition:

The foreign exchange market can be defined as the collective activity of exchanging currencies i.e. where currencies are bought and sold. The price for the currency is known as the exchange rate.

This is one unique market that is not located anywhere but exists on electronic platforms – telephones, telex, internet and other electronic gadgets.

The reality of today is that most convertible currencies offer a 24-hour access for market participants. This unique feature has brought with it significant depth in the market.

The Nigerian foreign exchange market:

The Nigerian foreign currency market is to a large extent a part of the global Fx market. However, it is still in the infancy stage in terms of development and does not offer a 24-hour access to the trading of its local currency.

To appreciate the Nigerian forex market it is pertinent to highlight its make up. In carrying out this analysis the market can be divided into two major categories;

• The official market
• The unofficial market

These markets have unique features, which therefore dictate the profiles of its participants.

The official market, as the name connotes, is the officially recognized market by the regulatory authorities. The market allows the sale of foreign currency for transactions that are eligible and allowed by the Central Bank of Nigeria (Federal Government of Nigeria). Such eligible transactions must be supported by all specified documents. This market is further broken down into two categories, the Central Bank of Nigeria (CBN) market & the Autonomous market.

The Central Bank of Nigeria (CBN) market: The market is peculiar in that it handles over 75% of the total volume of foreign currency sold in Nigeria (excluding inter-bank). The market is also used to manage the foreign exchange rate in the economy. The system currently adopted to sell foreign currency in the CBN market is the Dutch Auction System. I have used currently because the CBN has adopted a variety of distribution methods over the years. The CBN rate sets the direction for the market. Its rate is usually the lowest in all the foreign currency markets.

The Autonomous market: This market comprises all other players in the official market other than the CBN. They are; ✓ The export proceeds market: This is the generic name for all foreign currency inflows outside of the CBN i.e. proceeds from exports, oil companies, government parastatals, individuals etc. The market supports the settlement required in the inter-bank market and settlements of capital accounts’ transactions that are not eligible for CBN funds though valid transactions.

✓ The inter-bank market: This market came into existence in September 1986 when the CBN allowed banks to trade foreign exchange amongst themselves (as is done internationally). The standard of trading in the market is “two-way quote” i.e. a quoting bank always gives its binding buying and selling rates to a calling bank.

There is heavy documentation and reporting requirement on the buy and sell sides in the export proceeds and inter-bank markets. In some instances volume limits are imposed.

✓ The Bureau-de-change: These are small outfits licensed by the CBN to handle retail cash transactions. Recently some of their members were licensed to process funds required for travel purposes i.e. Business Travel Allowance (BTA)/Personal Travel Allowance (PTA).

The unofficial market warehouses all FX utilisation that are not eligible, i.e. not allowed by...
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