Foreign Exchange, Finance, Exchange Rates.
By Chukwudi (Chudi) Ofili
On June 14, 2023, the Central Bank of Nigeria through a circular titled “Operational Changes to the Foreign Exchange Market” (the “Circular”) introduced key changes to Nigeria’s foreign exchange regime. The notable change, which has dominated the headlines of national dailies, is that Nigeria has now adopted a “floating” or “market determined” exchange rate as opposed to the CBN rate which over the years did not reflect the economic realities of the market. Hence, the wide gap between what was the official “CBN rate” and the “parallel market” rate. It is important to note that there are other key changes which have been introduced by the Circular. The notable changes are highlighted below:
Key Highlights of the Circular
1. No more Segments
There will no longer be segments in the Nigerian foreign exchange market. All segments will now be collapsed into the Investors & Exporters (I&E) Window. The I&E Window was set up by the CBN in April 2017 to boost liquidity in the Nigerian foreign exchange market and ensure the timely execution and settlement of eligible transactions. In addition, the Circular emphasizes the fact that applications for medical expenses, school fees, Business Travel Allowance (BTA)/Personal Travel Allowance (PTA) and SMEs would continue to be processed through the deposit money banks (DMBs). This suggests that the existing forms such as Form A will continue to be used to access foreign currency in the I&E Window from DMBs at market determined rates.
2. Market Determined Exchange Rates
The Circular emphasized the re-introduction of the “Willing Buyer, Willing Seller” model which was first introduced in 2017 by the I&E Window Circular (as defined below). What this means is that the exchange rates for the transactions completed in the I&E Window (which is now the only window/segment) will be as agreed between Authorised Dealers and their counterparts. By the Revised CBN Foreign Exchange Manual (the “FX Manual”), “Authorised Dealer” is defined as “any bank licensed under the Banks and Other Financial Institutions Act 1991 as amended and such other specialized banks issued with a license to deal in foreign exchange.” By the Circular, individuals and businesses may access foreign exchange for eligible transactions from Authorised Dealers using market determined rates. By the CBN circular titled “Establishment of Investors’ & Exporters FX Window” dated April 21, 2017 (the “I&E Window Circular”), the transactions eligible to access the I&E Window are:
Invisible Transactions – this includes loan repayments, loan interest payments, dividends/income remittances, capital repatriation, management service fees, consultancy fees, software subscription fees, technology transfer agreements, personal home remittances and any such other eligible invisible transactions including “Miscellaneous Payments” as detailed under the Memorandum 15 of the FX Manual.
Bills for Collection – a common method of obtaining payment in international trade transactions where the exporter instructs a bank to accept payment from a buyer (importer)
Any other trade-related payment obligations (at the instance of the customer)
Notwithstanding the “unification of the exchange rate” or better still, the reintroduction of market determined exchange rates, operations in the I&E Window must be guided by the provisions of the I&E Window Circular. An important point to note is that the CBN reserves the right to intervene as a buyer or seller in the I&E Window.
3. Government Related Transactions
All government related transactions such as oil exports are now to be settled using the exchange rates from the I&E Window from the previous day (previous day weighted average rate).
4. Hedging FX Positions
The Circular includes changes to the trading limits on oversold and overbought foreign exchange positions. The proscription of trading limits on oversold positions provides more flexibility, allowing market participants to hedge short positions with over-the-counter (OTC) futures. On the other hand, limits on overbought positions have been set to zero, preventing excessive accumulation of foreign exchange.
5. Other Changes
The CBN also stopped the RT200 programme and the naira4dollar remittance scheme. These schemes, which incentivised remittances and encouraged the inflow of foreign currency, will cease from June 30, 2023. This is expected to result in huge savings for the government as the Nigerian government had spent billions of Naira on these schemes.
All transactions are to be cleared by a Central Counter Party (CCP). A CCP is a financial risk management institution that interposes itself between counterparties to contracts traded in financial markets and takes on counterparty credit risk between parties to a transaction. CCPs provide clearing and settlement services for trades in foreign exchange, securities, options, and derivative contracts. CCPs have become even more critical in financial markets, with clearing now globally accepted as an effective risk management mechanism.
There are a few grey areas that require clarification and perhaps further policy changes. A few are highlighted below.
On June 23, 2015, the CBN placed restriction on 41 items as items that are not valid for foreign exchange in the foreign exchange market in Nigeria. Clarity is required on whether the restriction on accessing foreign currency for the excluded 41 items remains vis-a-vis the definition of “eligible transactions” as set out in the I&E Window Circular and the FX Manual. The CBN on 16th June, 2023, via its Twitter handle did confirm that "the status quo remains on the  non-eligible items. The items are not permitted to be funded from the I&E Window".
The requirement for a Certificate of Capital Importation (CCI) for the inflow of capital by investors will have to be reviewed as it appears inconsistent with the new changes. Since its main use case is that the CCI enables an investor to repatriate its funds through the official market with typically more stable and favourable rates, it is expected that with the introduction of the “Willing Buyer, Willing Seller” model and the unification of the exchange rates, the CCI regime will be a thing of the past.
Similarly, the requirement to register technology contracts with the National Office for Technology Acquisition and Promotion (NOTAP) to be able to access the foreign exchange market to make fee payments under those contracts should also be expunged.
Overall, the recent changes are widely regarded as positive and are expected to improve investor confidence as well as improve foreign portfolio and foreign direct investments. Issues remain with the significant backlog of foreign currency demands by foreign investors who have found it difficult to repatriate their investment proceeds. Curious to see the further policy changes that follow this as well as the government’s attempts at ensuring supply of foreign currency to meet the existing backlog of demands.
Originally published by Chukwudi (Chudi) Ofili on LinkedIn
Reach Chukwudi (Chudi) Ofili on LinkedIn.