Market News

•Understanding the latest gains against the dollar

•How Trump presidency may affect us

•Rewane, Muda Yusuf, Onyekpere, others speak

By Tunde Oso

The naira appreciated by N137.69 against the United States dollar within a week, following the introduction of the Central Bank of Nigeria’s (CBN) new foreign exchange (FX) platform.

Data obtained from the CBN’s website showed that the closing exchange rate, which was N1,672.69 per dollar on Friday, November 29, 2024, rose to N1,535/$ at the end of the week on Friday, December 6, 2024, representing an 8.24 per cent gain.

Unknown to many Nigerians, the CBN recently launched a new trading system called the Enhanced Foreign Exchange Market System (EFEMS). EFEMS essentially consolidates all previous official FX windows into one unified system.

This consolidation replaces the fragmented structure of multiple windows, such as the Investors & Exporters (I&E) FX Window, the SME Window, and the Invisible Window.

According to the CBN, EFEMS is expected to simplify operations and improve price discovery, thereby ensuring that trades are more transparent and easier to monitor.

This has largely contributed to the positive outcomes currently being recorded in the official exchange rate.

One person familiar with the operation of the market suggests that the market is experiencing more supply than demand. With supply outstripping demand, the naira has gained against the dollar.

However, it is unclear where the supply in the market is coming from, as there is no official data to explain this.

For instance, the dynamics of pricing might change if the supply is primarily driven by the CBN.

The new system also mandates a minimum trade value of $100,000 for all interbank FX transactions, which seems to have curtailed speculative activities in the market.

Opaque system

Unlike the previous opaque system, FX dealers said the current system is order-based, similar to the way stocks are traded on the NGX.

For example, bids (buying requests) are displayed on the system along with their bid prices, while offers (selling requests) are also shown with their corresponding prices.

This makes it easier to determine how much FX is available in the market and the prevailing prices.

The CBN’s new guidelines for FX trading also introduce rigorous reporting requirements.

For example, Authorized Dealers must report FX transactions to the CBN within 10 minutes via an API-based system.

BDCs are required to submit daily activity reports through automated portals, while Commercial and Merchant Banks must adopt real-time reporting to enhance monitoring and oversight.

BDC role

The role of Bureau De Change (BDC) operators is critical under the new regulations, fostering further transparency in the functioning of the market.

For instance, under the new guidelines, licensed BDC operators are allowed to buy FX from authorized dealers to meet customer needs.

This measure aims to balance market accessibility with effective monitoring and control.

The BDC segment, which had previously been excluded from certain FX market activities, is now positioned to play a more active role in meeting retail FX demand.

This inclusion is expected to provide a buffer against the FX pressures faced by individuals and small businesses reliant on BDC services.

If BDCs are sourcing FX from the same market, their pricing is unlikely to differ significantly from official rates, reducing the wide disparities previously observed.

This marks a significant departure from earlier years when the black market often influenced official rates.

However, this expanded operational scope comes with conditionality: The total monthly transactions for BDCs are subject to an aggregate cap as determined by the CBN.

The Association of Bureau De Change Operators of Nigeria (ABCON) stated that the permission for BDCs to purchase foreign exchange directly from Authorized Dealers is not automatic.

Only BDC operators that meet the current capital requirements are permitted to participate in this market.

“We received the news with mixed reactions,” said Aminu Gwadabe, ABCON President.

“While it is intended to increase liquidity at the retail end of the forex market, it is contingent on meeting the new recapitalization requirements of either ¦ 500 million or ¦ 2 billion as stated in the May guidelines.

“However, it does not specifically permit all currently licensed BDCs to purchase foreign exchange from the interbank market.”

He added, “It is tied and subject to meeting the new capitalization guidelines introduced by the CBN in May 2024.

“This also addresses questions about the sources of funds under the new BDC guidelines raised by many applicants. It is not automatic but conditional on meeting these new requirements.”

Panic Selling

Panic selling is widely regarded as a significant factor behind the sharp appreciation in the exchange rate between the naira and the dollar.

Several economic reports have suggested that the exchange rate of N1, 600/$1 is not reflective of the naira’s true value, an opinion volunteered by the CBN Governor Yemi Cardoso at the Bankers’ Committee Annual Dinner.

Uncertainties rule market

Some speculators also point to the December period, which, according to historical data, is often associated with the naira strengthening against the dollar.

This trend is partly attributed to increased dollar inflows from Diaspora Nigerians returning for Christmas holidays.

It is also observed that similar boosts in Nigeria’s FX market have been observed before, where the naira suddenly gains strength before depreciating again.

For example, in April this year, the naira appreciated to as high as N1, 072/$1 before it started to weaken again.

At the time, the CBN had just lifted the suspension of FX sales to BDC operators, injecting liquidity into the system.

Sunday Vanguard aggregated the opinions of economists and financial experts even as the developments also attracted comments of others.

Naira undervalued by over 26% , says Rewane

During a presentation earlier in the year, Bismarck Rewane, Managing Director/Chief Executive Officer of Financial Derivatives Company Limited, said naira was undervalued by 26.56 percent at the official market and saw the currency appreciating to N1, 525 per dollar in 2025.

Rewane pointed out that the gap between the NAFEM and the parallel FX market had narrowed to as low as N4.75.

However, he observed that the naira’s volatility in the parallel market persisted due to factors such as low-interest rates, speculation on the naira, and FX scarcity.

Presently, the exchange rate gap between the NAFEM window and the parallel market stands at N155.49 per dollar.

Then, at the official market, the dollar was quoted at N1, 089.51, while in the black market, it was valued at N1, 245/$ last week.

Rewane expressed that at the parallel market rate of N1, 245/$, the naira was undervalued by 35.73 percent.

The expert emphasized the pivotal role of capital control measures in shaping the future of the naira. According to him, the removal of these controls, coupled with increased transparency in the FX market, was poised to fortify the naira’s position.

In the optimistic scenario envisioned by Rewane, the elimination of capital controls was anticipated to usher in a new era of transparency and confidence in the FX market.

Predicting stability, he foresaw the exchange rate stabilising at N900 per dollar throughout the years 2024 and 2025.

Additionally, he expected a substantial surge in foreign inflows, estimating an influx ranging from $8 to $10 billion in 2024 and N1 billion in 2025. This upswing is anticipated to result from various channels, including remittances, foreign direct investment (FDIs), foreign portfolio investment (FPIs), and invisible transactions.

Muda Yusuf: Challenge now is how to stabilise naira in 2025

Dr Muda Yusuf, Chief Executive Officer, Centre for the Promotion of Private Enterprise, CPPE, also spoke, saying, “The foreign exchange market has witnessed a significant level of stability in the past 5 to 6 months.

“Evidently, the degree of volatility that we saw last year and early part of this year has reduced significantly.

“So I think we must give some credits to the Central Bank of Nigeria, you know, for some of these outcomes because some of the positive outcomes that you have witnessed are also results of the various steps that have been taken by the Central Bank of Nigeria within the framework of the foreign exchange policy reforms.

“For instance, we have seen some remarkable inflows from the IMTOs, That is, International Money Transfer Organizations.

“The inflows from this window, inflow of FX, I mean, has improved considerably over the last few months.

“You know, before now, there were all manner of restrictions, particularly with regard to the exchange rates, on which inflows can be brought into the country.

“But now that we have a largely liberal exchange rate regime, the inflows from the MTOs have improved significantly because people are now free to bring in their funds at whatever the market exchange rate is.

“And, there’s also the window of willing buyer, willing seller. So that has had some impact on the positive outlook that we have seen with respect to the naira.

“Then not too long ago, we had a domestic dollar bond that was issued by the Minister of Finance.

“The dollar bond was $500,000,000, and it was even oversubscribed.

“So that also has contributed to the dollar liquidity in some ways, and that has also helped the capacity of the CBN to be able to stabilize the market.

“Then only last week, the government issued a $2,000,000,000 euro bond, which was also oversubscribed.

“So evidently, that will also have some impact on our foreign reserves, and it will also affect expectations with respect to the outlook for our exchange rates.

“Because once we have some positive expectations, the speculative pressure on the currency typically reduces, so the euro bond could also have been a factor in what we have seen.

“And, generally, we have seen that we now have our reserves, foreign reserves in excess of 40,000,000,000 US dollars.

“I know it is the result that determines the capacity of the central bank to intervene to stabilize the market.

“So that’s also a major source of confidence for economic players both within and outside the country.

“That, again, had helped to moderate the speculative pressure on the currency.

“And it’s also on record that the CBN has cleared the entire foreign exchange backlog that’s the obligations inherited by this administration.

“There have been some steps taken also to clear some of the debts that were owed. Some debts overhang. I’m talking of external debt now.

“And, we have seen consistent intervention by the central bank in the foreign exchange market, obviously, because the results have improved.

Nothing to support naira strengthening is sustainable — Onyekpere

The Lead Director, Centre for Social Justice, Eze Onyekpere, on his part, said: “The business environment doesn’t support the strengthening of the naira.

“We will have seen, I mean if we are earning so much new foreign currency in terms of from exports, if that is the case, or if the factors, affecting inflation, particularly importation of goods and services has more or less mellowed down, or if we are having good production at the domestic level and, decrease in our appetite for foreign goods and services.

“So, it could possibly be an outlier period if more dollars are coming.

“Maybe more borrowed money has been drawn down or any money that may have shored up the value of the naira in the short term, but not necessarily for an extended period.

“Although if it happens, it will be something every one of us would like to have, but there’s nothing to support such a position, so, how is this sustainable?

“I don’t see it as sustainable. I do not see it as sustainable. The only thing that can be done, like I said, is that if we can produce more, reduce imports, and keep exporting more, then, and, of course, and more foreign currency, we can begin shoring of the value of the variable.

“But for now, that is not happening. Will you trace it to more exports in the oil sector via the automotive refinery for the company?

“We have not owe it has not gotten to that level. It’s just doing exploratory exports. We have not sustainably started exporting that we can say we are sure of $1,000,000 or $2,000,000,000 every month. That’s the unfortunate position”.

Capacity to intervene

“So the CBN now has the capacity to intervene. So from time to time, whenever there is a risk of sharp depreciation, the CBN intervenes in the market, unlike what you had last year or earlier this year.

“So the periodic intervention of the central bank has also contributed to what we have seen.

“Then we have seen some policy measures to cope with malpractices in the foreign exchange markets because the market is also facing a lot of risk because of the malpractices and by so many unscrupulous players in the market, speculators, market manipulators, and so on.

“So the CBN has been rolling out various policies to properly regulate the market and to reduce speculative activities and manipulative activities taking place in the foreign exchange market.

“We have seen some improvement in portfolio inflows as well because of the high interest rate regime.

“We have seen the measures taken with the net open position, which had also made it mandatory for the banks to offload.

“It made it mandatory for the banks not to hold on to too much of their dollar portfolio in their kit.

“So a combination of some of these, the combination of these measures that I’ve mentioned has contributed significantly to the improvements in the exchange rates that we saw.

“But again, you know, there are also some risks because a lot of people have also expressed concern about sustainability.

“For instance, the sharp improvements we saw in the currency or the sharp appreciation that you saw in the currency in the last one week, things that were poor in low, triggered a lot of excitement.

“But soon after, we are seeing some slight depreciation as well.

“And you know the CBN also introduced this electronic market system in the FX markets which may have reduced some of the sharp practices in the markets.

“But I’m not sure that we have been able to fix the challenges posed by speculators and those manipulated in the market because soon after the rally of the currency, we saw depreciation again in the last few days.

“So there is still a lot of work to be done. Then there are also risks to the foreign exchange rates, as you call downside rates.

Oil price

“The downside risk includes the outlook for oil price, because it is said that under the Trump presidency, oil price may not be as high as it is, and that may affect our oil outputs.

“And therefore, that may affect our foreign exchange earnings from oil. We’re also likely to see a stronger dollar under the Trump presidency.

“A stronger dollar means a weaker naira exchange rate because the Trump presidency is likely to make the economy of the United States much stronger. “And when you have a stronger economy, you’re likely to have a stronger currency.

“And, the Trump presidency again is likely to come with significant trade wars because Trump has given indication of an increase in tariff for Chinese products, Canadian products, and even products from the EU.

“All of these may create challenges of inflation in the United States. And when you have the challenge of inflation, the natural response from the Federal Reserve of the US is to raise interest rates.

“So that, again, may have adverse implications for portfolio flows into the Nigerian economy. Then there’s also the risk of growing fiscal deficits by our own government.

“We have been told now that the government is contemplating a N48 trillion budget in 2025.

“So, the risk of fiscal deficits remains very high. And, the risk of increasing debt also remains high.

“And all these variables have implications for increased liquidity.

“Liquidity, I mean, in the economy, also sometimes creates problems of exchange rate depreciation.

“So these are some of the downside risks that one sees, as far as the economy is concerned.

“But the good thing is that we have seen some significant level of stability, which is what investors want. Investors appreciate that.

“And they also appreciate the fact that there’s better liquidity in the foreign exchange market than what it used to be.

“So, all of these have elevated the confidence of domestic and even foreign investors in our economy. “The challenge now is how to sustain the stability and how to ensure a much deeper coordination between the monetary and fiscal policies to ensure that we sustain the current stability in the foreign exchange market”.

Nigeria resource-rich to raise naira up — Ekekwe, Tekedia Capital Chair

 Professor Ndubuisi Ekekwe, Lead Faculty of Tekedia Institute, and Chairman of Tekedia Capital, said current developments are good news for naira. “The news that the Central Bank of Nigeria (CBN) has begun to clear some of its FX backlogs has spurred an appreciation of the naira in both the official and parallel exchange markets”, Ekekwe said.

“The naira rose to N1,004/$1 in the parallel market and around N793.28/$1 in the official window, underscoring a notable performance compared to Wednesday, when it traded at N1,142/$1 and N799.32/$1 respectively, according to FMDQ OTC Securities Exchange.”

Speaking on his X handle, he went on: “This is a welcome development. Nigeria is working on the supply side and if that happens, the pricing equilibrium will shift, ECON 101. That said, we need to think today, tomorrow and the long-term.

“Why? If you live in Lagos and borrow from loan app A to pay app B, to avoid problems, remember that one day app B will come for its money. So, to deal with the root cause and avoid wahala, you need to find that money fast to pay B.

“Nigeria, as I have noted, has tools to shore up the value of the naira in the short-term, as we are a resource-rich nation (gas, crude oil, lithium, etc); the challenge is maintaining the stability over the long-term.

“Fascinatingly, that requires productivity which goes beyond pre-selling crude oil and gas. I wish the team good luck on this. Help us make things in Nigeria and become more productive. If not, loan app B will come knocking and Naira will bleed again”.

CBN’s EFEMS the game-changer — Bolgent, AgriTalker EcoSolutions

 Vangawa Bolgent – Editor in Chief – AgriTalker EcoSolutions, said, “The introduction of EFEMS by the CBN has been a game-changer, addressing the long-standing issues of market opacity and inefficiency.

“By consolidating all FX windows into a centralised platform, the system has brought transparency and accountability to the FX market.

“EFEMS is a breath of fresh air. For the first time, Nigerians can see real efforts to streamline FX trading, reduce speculation and create a level-playing field.

“When the Naira gains value, it reduces inflationary pressure. It stabilises import costs, making goods and services more affordable for consumers. It strengthens small businesses, which are the backbone of our economy.”

Bolgent spoke in response to recent comments by Gwadabe (ABCON leader) arguing against the rise in the value of the naira. “A stronger dollar means a weaker naira exchange rate because the Trump presidency is likely to make the economy of the United States much stronger.”