The FMDQ asked banks to start quoting rates from the Investors’ & Exporters’ FX Window instead of the CBN official rate. The FMDQ OTC is the official market for trading debt securities, forex and other financial products in Nigeria.
This window was created by the Central Bank of Nigeria (CBN) in April to boost liquidity in the forex market and ensure timely execution and settlement for eligible transactions.
The true reflection of Naira in the Fx Market
Analysts had earlier advocated for a Naira value that is solely determined by market forces, as opposed to the artificial value being propped up by CBN, in order to attract Fx inflows and solve the Fx scarcity problem. With the establishment of the I&E window, participants could now trade among themselves and reach a market-determined Naira value.
Regarding the new development from FMDQ, Kunle Ezun, an analyst at Ecobank while speaking to Bloomberg said: the idea is
“to show the true reflection of the naira in the market. The I&E window in terms of transparency and price discovery seems to reflect where the naira should trade. All banks are now putting quotes at that rate.”
The genesis of Nigeria dollar shortage
The fx issue in Nigeria started when the price of oil, Nigeria’s major export commodity and source of foreign earnings crashed in 2014. This led the Central Bank to introduce different measures such as banning the importation of 41 items and restricting the flow of dollars.
As the squeeze worsened, Nigeria opted for a system of multiple exchange rates rather than floating its currency like other crude producers such as Russia and Kazakhstan.
Problem with the multiple rates
With multiple exchange rates it is difficult to determine the true value of the currency. The official rate for the naira is N305/$, however, banks lend to each other at a different rate (the interbank rate) while a third rate is used by international money transfer companies. The CBN also maintains separate rates for religious pilgrims who need dollars for trips to Mecca, Rome or Jerusalem. There is also the black market which had been the most relevant because it is more market-determined.
Full Unification may still be some way off
The central bank keeps the official rate at N305, to ensure among other things that fuel importers access dollars cheaply. A complete exchange rate unification across will imply higher fuel prices and cause inflation to spike.