Restoring Sanity to Foreign Exchange Market Operations
In this piece, James Emejo examines ongoing efforts by the central bank to maintain price stability and restore order in the country’s foreign exchange market
only recently Governor of the Central Bank of Nigeria (CBN), Mr. Olayemi Cardoso, unveiled the Nigeria Foreign Exchange Code (FX Code), a framework designed to halt years of unethical practices by players in the FX market.
The code consists of six guiding principles and 52 sub-principles, which Cardoso said must become the standard for conduct across all participating institutions.
The core principles include ethics, governance, execution, information sharing, risk management and compliance, and confirmation and settlement processes.
Inevitable Rule Book
The introduction of the document was particularly crucial for the success of the apex bank’s monetary interventions in the economy considering that forex plays a critical role in price and economic stability, especially for economies including Nigeria that depends on imports, export or foreign debt.
A stable and well-managed forex policy is essential for maintaining inflation control, economic growth, financial stability, and investor confidence as countries often use tools like interest rates, forex reserves, and capital controls to manage exchange rate fluctuations and ensure economic stability.
A Chaotic Landscape
Before Cardoso assumed office in 2023, the country’s FX market was marked by unwholesome activities of market participants including round-tripping and speculation, hoarding, multiple exchange rates, arbitrage, and rent-seeking behaviours – all of which had contributed to market distortions, currency volatility, and instability in the forex market.
The central bank governor has always pointed to the fact that restoring investor confidence and stability in exchange rates remained key to attracting Foreign Direct Investment (FDI) and portfolio investments into the Nigerian economy.
According to Cardoso, the FX code was a decisive step forward, setting clear and enforceable standards for ethical conduct, transparency, and good governance in the FX market, and sanitising market practices, and entrenching good governance.
The code further stipulates penalties and administrative actions for violations. Cardoso also realises that exchange rate stability remains a cornerstone of macroeconomic health for the Nigerian economy, influencing critical indicators such as the balance of payments, external reserves, international trade, inflation, economic growth, and foreign investment.
He noted during the launch of the code, alongside chief executives of Deposit Money Banks (DMBs) who took their turns to sign the framework as a mark of commitment to ensuring compliance, that previous irregularities by market participants had led to the accumulation of about $7 billion FX backlogs which he inherited on assumption of office – and most of which were not genuine according to ongoing forensic audit of past transactions in the market.
Need for Orderliness
Nonetheless, the CBN governor said the FX code represented a firm rejection of previous distortions in the market and an equally firm commitment to a future defined by fairness, trust and market-driven principles.
The governor warned that the central bank would not tolerate any attempts to revert to past unethical practices, adding that any individual or institution that violates the FX code will face swift and decisive sanctions.
He said the central bank will not hesitate to act against any institution or individual that undermines the integrity of the country’s financial markets, adding that the code remains a binding commitment to accountability and transparency.
Cardoso said, “Let us be clear; the system itself played a key role in the challenges of the past. Unethical behaviours and systemic abuses – whether by those with privileged access or by complicit participants eroded public trust and harmed our economy.
“Our journey towards market reform is already yielding results. The year 2024 was marked by structural reforms which sought to return the naira to a freely determined market price and ease volatility as several distortions were removed from the market.”
Analysts’ perspectives
The introduction of the code has been highly commended by stakeholders and analysts who summarised the development as critical to purging the segment of existing rot and restoring trust in the system.
Cardoso, recently stated that despite Naira’s volatility in recent years, the international community believed the currency is now reflective of its real rate and currently more competitive, largely because of the reforms so far introduced since the new emergence of the current leadership of the bank.
He said the reforms have continued to attract foreign investors into the economy, vowing that the monetary authority will do everything possible to ensure that current inflows continue, and preserve the positive outcomes – thus the advent of the FX code.
Analysts, in separate interviews with THISDAY commended that the CBN’s for its previous interventions including unifying the exchange rate to eliminate arbitrage opportunities as well as strengthening regulatory oversight to curb illicit forex activities, enhancing transparency in forex allocations, encouraging exports to boost forex inflows, and promoting local production to reduce reliance on imports. They said these measures were crucial in addressing the challenges in the FX market.
A renowned economist, Dr. Chijioke Ekechukwu, described the FX code as one of the steps and reforms taken by CBN to sanitise the foreign exchange market.
He said, “The FX market needed to improve on their ethical practices and governance. Compliance has been made compulsory by the CBN as Deposit Money Banks have signed to the code of compliance, meaning that they agree to any sanctions arising from the default of this code.”
According to the former Director General, Abuja, Chamber of Commerce and Industry, the code can “only try to sanitise the market. It cannot eliminate these malpractices completely. The market players will always find ways of circumventing the code, but with strict supervision by the apex bank, sanity will return to the FX market”.
Nonetheless, he said the FX framework aimed at making the FX market more transparent and accountable, adding that the code was meant to eliminate unwholesome malpractices in the marketplace.
Also, Managing Director/Chief Executive, SD&D Capital Management Limited, Mr. Idakolo Gbolade, said the introduction of the FX code for operators will sanitise the forex market from unwholesome practices perpetrated in the past that made operators record unprecedented profits from the system.
He said, “The introduction of the FX code has strengthened the Naira and improved corporate governance. It has also mandated transparent reporting systems to have boosted the confidence of both buyers and sellers in the system.
“The FX code can go a long way to sanitise the sector if sanctions are meted to defaulting operators and the CBN drives compliance for all stakeholders.”
FX Market as Panacea for Macroeconomic Stability
Analysts further agreed that irregularities in Nigeria’s FX market could significantly weaken the Naira, reduce its value, and disrupt price stability. These irregularities further create distortions that lead to forex shortages, increased inflation, and economic instability.
Commenting on the FX code, Group Managing Director/Chief Executive, United Bank for Africa (UBA) Plc, Mr. Oliver Alawuba, commended the CBN for its steadfast leadership and impactful reforms championed in recent years, stressing that these initiatives have been pivotal in stabilisng the FX market, restoring investor confidence, and ensuring a more sustainable and resilient financial system.
Alawuba stressed that from policy innovations to strategic interventions, the CBN had proven to be the cornerstone of the country’s economic stability.
He said the introduction of the FX code remained yet another bold and visionary step which not only complements other notable reforms of the CBN but also sets a new benchmark for accountability and integrity in the FX market. The UBA GMD pointed out that by embedding global best practices and fostering a culture of trust and equity, the code will enhance market efficiency, attract greater participation, and elevate Nigeria’s standing in the global financial landscape.
He described the launch as a call to action for all stakeholders to uphold the principles of fairness, ethical behaviour, and professionalism.
He said, “The strength of any financial market lies in the integrity of its participants, and with the Nigeria FX Code, we now have a unified platform to reinforce this commitment.
“As we witness the ceremonial signing of this Code today, let it engender a reawakening of our collective responsibility to safeguarding the credibility of our FX market.
“Together, we can ensure that this market becomes a beacon of excellence, one that inspires confidence both locally and globally.”
He also expressed optimism that the initiative will usher a new era of transparency, trust, and progress for Nigeria’s FX market and the economy at large.
A New Dawn
According to the CBN governor, the introduction of the code marked a new era of compliance and accountability.
He said, “It is not just a set of recommendations; this is an enforceable framework. Under CBN Act 2007 and BOFIA Act 2020, violations will be met with penalties and administrative actions. Market participants must recognise that adherence to these principles is not merely about compliance but about restoring public trust in our financial system.
“Beyond the foreign exchange markets, the FX code forms part of our renewed focus on compliance across the financial services industry and I am particularly pleased that we have the leadership of the industry in this room to reinforce a collective commitment to the journey ahead.
“Self-regulation and conduct are at the core of the changes in culture we expect to see at play in the industry, and I expect the principles of the FX Code to be applied across other business areas.”
