Bureau De Change (BDC) Operators, under the aegis of the Association of Bureau De Change Operators of Nigeria (ABCON), have revealed that the naira is fast becoming the most unpredictable currency in the world.
They noted that the local currency has in recent times been going through an inconsistent journey and has been greatly affected by all kinds of wars ranging from trade, rate as well as speculative attack.
This was disclosed by ABCON President, Aminu Gwadebe, during an exclusive chat with Nairametrics over the weekend where he admitted that the foreign exchange (forex) market is facing some challenges.
The Nigerian foreign exchange market has been experiencing some high level of volatility with the licensed currency traders complaining of a shortage of forex and accusing the commercial banks of not selling dollars to them.
Gwadebe in his statement said, ‘’The Naira, unfortunately, is suffering an inconsistent journey bedeviled by all kinds of wars ranging from Trade war, rate war and speculative attack and therefore becoming the most unpredictable currency in the world.’’
Challenges affecting the forex market
The ABCON boss highlighted some of the challenges affecting the forex market including global economic uncertainty, regulatory changes, technology advancements, and market volatility.
Gwadebe noted that economic slowdowns in major economies like the US, Europe, and China have resulted in decreased trade volumes and increased market volatility.
He also stated that the recapitalization policy for the BDCs has given rise to compliance costs for forex brokers and impacted market liquidity.
In summary, he said that these challenges have resulted in increased market volatility, reduced liquidity, higher trading costs, and greater regulatory scrutiny
Gwadebe said, ‘’The foreign exchange (forex) market is indeed facing challenges. Here are some key issues:
Global Economic Uncertainty
- Economic slowdowns in major economies, such as the US, Europe, and China, have led to decreased trade volumes and increased market volatility.
Regulatory Changes
- Stricter regulations, such as recapitalization have led to compliance costs for forex brokers and impacted market liquidity.
- The US Commodity Futures Trading Commission’s (CFTC) regulations on leveraged forex trading and Trade tariffs also affected the market.
Technological Advancements
- The rise of electronic communication networks (ECNs) and the adoption of automated trading systems have increased market efficiency but also introduced new risks, such as flash crashes.
- The growing use of electronic framework, artificial intelligence (AI,) and machine learning (ML) in forex trading has created new opportunities for traders but also raised concerns about market manipulation.
Market Volatility
Increased geopolitical tensions, such as the growing mistrust in Global interactions have led to market volatility and fluctuations in currency values.
The ongoing USA Tariffs have also contributed to market uncertainty through the exit of portfolio investors to a safer heaven.’’
Addressing the forex volatility
Gwadebe suggested several steps the government can take to address foreign exchange volatility. This includes increasing the bank liquidity ratio to 40%, intensifying its exchange rate unification efforts, increasing transparency and communication, making BDCs direct agents of International Money Transfer Organizations (IMTOs), and increasing Nigeria’s eternal reserve.
According to the ABCON President, these steps are;
- Unify Exchange Rates: The Central Bank of Nigeria (CBN) has already taken a step in this direction by announcing the removal of all restrictions on foreign exchange rates and adopting a “willing buyer, willing seller” arrangement. This move aims to create a single, unified exchange rate, which can help reduce volatility.
- Increase Transparency and Communication: The CBN should provide more information about demand and supply trends in the foreign exchange market. This can help businesses and individuals make informed decisions and reduce speculation.
- Develop a Deep and Liquid Foreign Exchange Market by Making BDCs direct agents of IMTSO: The government can work to create a more diverse and liquid foreign exchange market. This can involve removing restrictions on foreign exchange transactions, encouraging more players to participate in the market, and developing new financial instruments.
- Manage External Reserves: The CBN should work to increase Nigeria’s external reserves, which can help stabilize the naira and reduce volatility. This can involve attracting more foreign investment, increasing exports, and managing imports more effectively and sales of our abandoned Assets.
Regarding the banks, Gwadebe said they have been responding to the foreign exchange scarcity by imposing restrictions on international transactions.
He said, ‘’For example, some banks have limited the amount of foreign currency that can be withdrawn or transferred abroad. The banks have also been working with the CBN to implement policies aimed at stabilizing the foreign exchange market.’’
He noted that to navigate these challenges, forex market participants must stay informed about market developments, collaborate with stakeholders, and adapt to changing regulations. He said they should employ effective risk management strategies to reduce the overload of negative perceptions.
What you should know
Nairametrics had earlier reported that BDC operators had attributed the crash of the naira in the foreign exchange market to the huge demand for forex due to the windfall from some contractual payments and releases by some Federal Government agencies.
Gwadebe, who admitted that the forex market is witnessing some unprecedented attacks, noted that the unfortunate development had once again given credence to the need for regulators to be consistent in the implementation of reforms and policies in a volatile forex market.
He had acknowledged that these occasional shocks in the foreign exchange market are fictitious, discretionary, and a burble that will burst.