Market News

September was clearly not a good month for the naira as the local currency sank to about N1,639.41/$1, its lowest against the greenback on the official market in nearly six months.

The naira did not fare any better on the parallel market either as it fell close to N1,700 per dollar, a development, currency dealers attributed to inadequate forex supply by the Central Bank of Nigeria (CBN).

Re-introduction of rDAS

Analysts pointed out, however, that apart from injecting millions of dollars into the forex market as part of its efforts to ensure exchange rate stability, between July and August, the CBN had also reintroduced the Retail Dutch Auction System (rDAS), which it had scrapped in February 2015, in order to address “undesirable practices including round-tripping, speculative demand and rent-seeking.”

The regulator explained that it reintroduced the rDAS, having noticed, “growing unmet FX demand from end users with banks,” which it said, “has continued to increase the demand pressure in the FX market with adverse impact of the exchange rate of the naira.”

Thus, in the circular, announcing the reintroduction of the rDAS, the CBN directed authorised dealer banks to provide it with a “legitimate list of all outstanding fx demand by Fx users,” which should contain information, such as, the customer’s name, address, contact information- including email, telephone number and Bank Verification Number (BVN)-, account number, Tax Identification Number (TIN), purpose for which the Fx is required, Form A or Form M and Letter of Credit number.

According to CBN data on the rDAS held on August 7, total bid valued at $1.18 billion was received from 32 Authorised Dealers Banks (ADBs), of which $876.26 million from 26 banks qualified at a cut off rate of N1495/$.

The apex bank also disclosed that bids from six banks valued at $313.69 million were disqualified.

Naira weaknes

But naira weakness persisted for most of September and the beginning of October last week also saw the local currency heading south.

In fact, with the naira falling to N1, 699 per dollar last Thursday, Bloomberg said the decline was caused by dollar supply on the Nigerian market falling by almost 50 percent to $176 million.

The news agency also said concern that the naira will continue to suffer was making Nigerian business to mull ways of reducing their exposure to the US currency. Indeed, it reported an analyst at Afrinvest West Africa, Nathanael Disu, as predicting that the naira could further fall to N1700-1800 per dollar before year-end, if dollars remain locally scarce.

The report also quoted Muyiwa Oni, an analyst at Stanbic IBTC Bank Plc, as saying, “one is still seeing volatility on the naira, so there’s still limited confidence in the currency. The biggest point is that as an institution you can’t control naira movement, but you can mitigate your risks.”

September sales data

However, in what appeared to be its strategy to debunk the notion that insufficient supply of dollar was responsible for naira’s weakness, the CBN, last Friday, announced that it sold foreign currencies worth $543.5 million to authorised dealer banks, through two-way quotes, at the Nigerian foreign exchange market (NFEM) on eleven dealing days in Septem ber.

– A press release posted on the apex bank’s website, signed by its Director, Financial Markets Department, Omolara Duke, said that the FX spot sales, which took place between September 6 and September 30, 2024, were aimed at reducing, “observed market volatility driven by high demand for commodity importation and seasonal demand for forex.”

The regulator said it issued the press release in order, “educate and provide guidance to the general public on the pricing of FX by taking a cue from the range of rates at which FX was sold by the CBN to Authorised Dealer Banks.”

The statement added that the CBN will continue to facilitate the supply of FX into the NFEM, “as part of its holistic FX management strategy.” An analysis of the fx sales data for the eleven dealing days published by the apex bank, shows that it sold the highest amount of $80 million on September 26 and the lowest amount of $17.5 million on September 23.

Further analysis of the data indicates that the CBN sold the forex to the authorised dealer banks at rates ranging between N1,530 per dollar and N1,605 per dollar

Nigeria pursues a floating exchange rate regime, and the value of the Nigeria naira is determined by the market forces according to the demand and supply of foreign exchange

Code book

Interestingly, 24 hours before it released details of its forex sales in September, the apex bank released an exposure draft of the Foreign Exchange (FX) Code Book for market participants, which it said, will become effective from October 14, 2024.

According to the banking watchdog, the FX Code , which draws on principles from the FX Global Code and best practices adopted in leading jurisdictions, “is intended to promote a robust, fair, liquid, open, and appropriately transparent market in which a diverse set of market participants, supported by resilient infrastructure, can confidently and effectively transact at competitive prices that reflect available market information in a manner that conforms to accepted global standards of behaviour and best practices.”

Affirming that “Nigeria pursues a floating exchange rate regime, and the value of the Nigeria naira is determined by the market forces according to the demand and supply of foreign exchange,” the CBN also said that the FX Code had been developed “to respond to emerging issues and address the dynamic nature of the financial markets and specifically address emerging challenges in the foreign exchange market.”

Specifically, the regulator said that the FX Code was organised around six leading principleethics, governance, execution, information sharing, risk management and compliance, as well as confirmation and settlement processes.

Market participants, according to the exposure draft, “are banks licensed by the Central Bank of Nigeria under the CBN Act 2007 and Bank and Other Financial Institutions Act (BOFIA) 2020 and engage in the wholesale foreign exchange business in Nigeria as part of their licensed business.”

The exposure draft said that market participants should conduct a self-assessment and submit to the apex bank a report on their institutions’ level of compliance with the FX Code by December 31, 2024.

It added: “All market participants will thereafter be required to submit to the CBN a detailed compliance implementation plan that is approved by its Board by December 31, 2024. The FX Code should be fully implemented, and each Market Participant be in full compliance by December 31, 2024.”

EFEMS

On the same day, the CBN also announced that it had introduced the Electronic Foreign Exchange Matching System (EFEMS) for forex transactions in the NFEM.

A circular signed by the apex bank’s Director, Financial Markets Department, Omolara Duke, said the EFEMS will be implemented not later than December 1, 2024, and that there will be a two-week test run in the month of November.

According to the circular, authorised dealers would subsequently conduct all forex transactions in the interbank forex market on the EFEMS approved by the CBN, “where transactions will be reflected immediately.”