Sustaining Forex Market Stability

EDGY OPTIMIST BY Obinna Chima

Liquidity is a core element of every financial market, including the foreign exchange (FX) market.  It is fundamental to financial markets as it helps to shape the degree to which an asset can be bought or sold without significantly affecting its price.

That is why central banks strive to ensure sustainable liquidity in every market. Central banks globally intervene in the FX markets to maintain liquidity, primarily to ensure the smooth functioning of currency markets, manage volatility, and ensure that economic stability is achieved or maintained.

Inadequate liquidity in the FX market can cause severe dislocations, disrupting international trade and hindering the ability of banks to intermediate.

Owing to this, the decision of the Central Bank of Nigeria (CBN) to allow licenced Bureau De Change (BDC) operators back into the Nigerian Foreign Exchange Market (NFEM) is a pragmatic move to enhance liquidity in the market.

By capping weekly FX purchases at $150,000 per BDC and enforcing strict compliance with existing operational guidelines, the CBN seeks to achieve a balance between market support and regulatory discipline, an approach that aligns with global best practices.

The latest policy is part of efforts to improve FX liquidity in the retail arm of the market and help meet legitimate needs of end users. Under the new directive, all BDCs duly licenced by the CBN are permitted to access FX through any Authorised Dealer Bank of their choice, at the prevailing market rates.

The policy, according to the central bank, is also aimed at deepening market efficiency and ensuring broader access to foreign exchange across the economy.

The regulator, however, imposed strict compliance and risk-management conditions on the transactions. That is, authorised dealers are required to conduct full Know-Your-Customer (KYC) and due diligence checks on BDC clients before any FX sale. To further strengthen transparency and accountability, the central bank directed that all licensed BDCs must submit timely and accurate electronic returns in line with extant regulations.

It also directed that any unutilised FX must be sold back to the market within 24 hours, as BDCs are prohibited from holding FX positions purchased from the NFEM. Additionally, it restricted settlement practices, mandating that all FX transactions be conducted through settlement accounts with licensed financial institutions.

Equally, third-party transactions are prohibited, while cash settlement is limited to a maximum of 25 per cent of each transaction amount.

For clarity, BDCs are not those men who stand on major roadsides in cities hawking foreign currencies.  They are different from the black market operators you see under trees. BDCs are licenced by the CBN and are authorised to conduct retail FX transactions. Their services include facilitating Personal Travel Allowance (PTA), Business Travel Allowance (BTA), as well as handling medical and school fees FX services.

It is also worth noting that this is not the first time the CBN is resuming FX sales to BDC operators after a period of suspension. In the past, the apex bank had halted the sales to BDCs as part of efforts to curb speculation, address corruption, money laundering allegations, tighten regulatory oversight, and sanction infractions by some currency dealers who were found to be abusing the system. However, successive CBN governors have, at different points, recalibrated the policy and restored limited access to BDCs in recognition of their role in deepening liquidity at the retail end of the market.

While for over two years since they assumed leadership, the Olayemi Cardoso-led CBN has been relentless in their pursuit of price and exchange rate stability to promote investor confidence and reduce uncertainty, the resumption of FX sales to operators in the retail arm of the market is expected to support liquidity and ease pressure on the naira which has been on the upswing since the new policy was announced.

But the central bank must be vigilant so as to guard against malpractices which were prevalent in that arm of the market in the past. The regulator must wield the big stick and punish dealers who sell FX to unauthorised buyers. Many BDCs had been sanctioned in the past for selling FX to unauthorised buyers, such as importers.

On their part, BDC operators, led by their association, must embrace innovation and build capacity to ensure compliance with extant regulations.

Beyond re-admitting BDCs to the official FX market, Nigeria’s policymakers must begin to look at the bigger picture by creating a conducive environment to attract Foreign Direct Investments, which are crucial to attracting the much-desired capital inflows, technology transfer, and job creation needed to stabilise the currency and deepen economic diversification.

Additionally, Nigeria’s unfriendly business environment has been largely identified as one of the factors that discourages foreign investments. Without resolving the power sector crisis and guaranteeing that Nigerians have access to reasonably priced energy, the country cannot attract the much-needed FDIs, as businesses are forced to produce a sizable amount of their electricity due to challenges in the sector. All in all, there must be harmony between the fiscal and monetary policy harmony to ensure sustainable growth and stability. Overall, this measured re-entry of BDCs into the NFEM underscores the CBN’s willingness to deploy pragmatic tools to stabilise the market while safeguarding integrity. If complemented by broader reforms to boost investor confidence and capital inflows, this policy could mark a meaningful step toward a more resilient and transparent foreign exchange regime.