On Wednesday, 14th June, 2023, the Central Bank of Nigeria (CBN) initiated the Investors’ & Exporters’ Foreign Exchange (The Unification of Nigeria’s FX windows) Window in a bid to improve liquidity and ease the prompt execution and settlement of eligible foreign exchange (FX) transactions.
The Financial Markets Dealers Quotations (FMDQ) Group PLC defines I&E FX window as a market trading segment for Investors, Exporters and Consumers that allows for FX trades to be made at exchange rates determined based on prevailing market circumstances, thus ensuring efficient and effective price discovery in the Nigerian FX market. What this means is that I&E FX window is a platform through which investors, exporters and consumers can trade based on the rates determined by the factors influencing the state of the economy. By doing this, the CBN aims to increase the value of the naira against the dollar on the long run. This starts with the removal of multiple FX rates to ensure that the exchange rate is determined by the operations of this window.
Before this policy was implemented, the Dollar traded between ₦460 and ₦470 as the official rate and traded between ₦765 and ₦770 as the black market rate. In comparison, the unified naira depreciated to ₦750 to a dollar officially during the intra-day trading last Wednesday.
The I&E FX allows for specific transactions including Invisible transactions, Bills for collection, and Trade-related payment obligations.
Invisible transactions are transactions that do not involve exchange of tangible goods/products, these include loan repayments, dividends and income remittances, capital repatriation, consultancy fees, technology transfer agreements, personal home remittances, etc.
In transactions involving import and export, Bills for collection protect the parties (importer/exporter) from default risk and foreign exchange fluctuations and provides a seamless settlement to trade by reducing ambiguity related to amount and time of payment. Bills for collection is a document issued by the exporter that provides an order for the importer to pay a fixed sum of money on demand or at a predetermined date.
Other trade-related payment obligations are to be carried out in the window based on the decision of the customer.
According to the policy, foreign currency for exchange is to be supplied by portfolio investors, exporters, authorised dealers and the CBN. These are the groups that will engage in the process of the window.
One major aim of the policy is to facilitate Price discovery such that the dollar rate is determined by the forces of demand and supply (buyer-seller interaction). In order to promote market transparency, the policy advises Authorised dealers (e.g. banks) to encourage their corporate clients (e.g. companies, businesses) to get familiar with the system in order to ensure that activities are carried out on the FX Trading Systems.
Would Nigeria benefit from this FX unification? What does the unification generally imply for Nigeria’s economy?
Generally, CBN’s new unification order can positively impact the economy of Nigeria in a number of ways.
First of all, governments’ revenue would rise in naira terms, thereby resulting in a higher tax/revenue to GDP ratio. This would enable the government to spend on more on infrastructure and other service that would benefit the society.
Also, there would be a possible reduction in budget deficit if government’s forex revenue exceeds foreign currency obligation and some cost savings as the Nigerian government discontinues the various FX interventions, e.g. Naira4Dollar, RT200, etc. which cost tens of billions of naira.
The country would also attract FX inflows, especially from portfolio investors, FDI and exporters proceeds.
Would the unification have any negative implications?
This unification order will most likely come with a number of unfavourable consequences.
First of all, external debt of $42bn would increase by the difference between the old and new rates. As a result of this, Nigeria’s debt-to-GDP ratio would increase by about 5 per cent.
Also, there would be a corresponding increase in debt service cost with respect to foreign debt service.
There could also be an impact on the pump price of petrol which could inch closer to the current pump price of diesel.
Conclusion
In the short term, this unification of rates has affected the prices of goods and services negatively, however, it is expected that over the cause of the year and the first quarter of 2024, the positive impact of the policy will start being felt.