The Nigerian Naira appreciated significantly against the US dollar throughout March 2024, marking a major turnaround for Nigeria’s exchange rate policy.
Official figures indicate that the Naira closed the month at N1309/$1 on the last trading day, up from N1595.11/$1 at the end of February 2024.
This 21.8% gain points to the success of several forex policies, strategies and interventions by the Central Bank of Nigeria (CBN) all aimed at stabilizing and strengthening the national currency.
In the parallel market, the Naira saw an even more pronounced recovery. The exchange rate improved from N1600/$1 in February to N1250/$1 in March, representing a 28% gain in one month highlighting the effectiveness of the measures taken to bridge the gap between the official and unofficial currency markets.
The gains in the official and parallel market are the largest seen in over 5 years. Before now, the exchange rate was fixed at about N450/$1 for almost two years and around N380/$1 between 2020 and early 2021.
Drivers of the Naira’s Appreciation
On the official end of the market, the apex bank started by addressing suspected cases of excessive foreign currency speculation and hoarding from Nigerian banks.
- In a circular titled “Harmonisation of Reporting Requirements on Foreign Currency Exposures of Banks,” the CBN stated that banks’ Net Open Position (NOP) must not exceed 20% short (owning more than owed) or 0% long (owning no more than the bank’s shareholder funds not reduced by losses) of the bank’s shareholders’ funds.
- Experts suggest this removed a huge area of speculation from the market, ensuring that only genuine demand for forex was being seen.
- The apex bank also announced the complete clearance of the valid foreign exchange backlog. They stated that they concluded the payment of $1.5 billion to settle obligations to bank customers, effectively settling the residual balance of the FX backlog.
On the retail end of the market, policies such as allocating $20,000 to each Bureau De Change (BDC) at a competitive rate and removing the exchange rate cap for International Money Transfer Operators have been pivotal in strengthening the exchange rate on the retail end.
- This follows a new guideline that increased the share capital of Bureau De Change (BDC) operators to N2 billion and N500 million for Tier 1 and Tier 2 licenses, respectively.
- The apex bank followed this up with the revocation of over 4,000 licenses of BDC operators.
- Also, as part of measures to manage demand in the retail end of the market, the apex bank stated there will be a cap on foreign currency purchases for school fees at $10,000 per customer annually.
- This process requires the transaction to be conducted through the BDC’s domiciliary account with a Nigerian bank, ensuring direct payment to the educational institution.
Perhaps the most effective policy so far is the crackdown on the cryptocurrency platform, Binance, which it accuses of aiding manipulation of the exchange rate system.
- Nigerian authorities blocked web access to cryptocurrency exchanges and then detained two Binance executives who had flown to Abuja to discuss the crackdown.
- In response, Binance has removed the naira for trading from its website.
- The eventual stop of Naira to stablecoin pairing on the world’s largest cryptocurrency platform meant a major benchmark for price gouging was removed.