The Electronic Foreign Exchange Matching System (EFEMS), which is meant to increase market transparency, took off last week.
In a circular signed by the Director and Financial Markets Department of the CBN, Dr Omolara Omotunde Duke, the apex bank said apart from banning negotiation of exchange rates with customers outside of the foreign exchange window, pricing of foreign exchange transactions in the consolidated Nigerian Foreign Exchange Market (NFEM) shall be undertaken on the EFEMS.
“FX market statistics including the daily transactional rates of all qualifying transactions on NFEM will be publicly available to guide market participants on the CBN website. All customer transactions outside the EFEMS shall be guided by the prevailing NFEM rate at the time of execution. Authorised dealers are required to adopt a transparent pricing framework for customer foreign exchange transactions as described in the Nigeria FX Code and may be requested by the CBN to provide information on their pricing methodology,” the apex bank directed.
On December 5, the naira broke the N1,600 barrier as it exchanged for N1,567 and further moved up to N1,535 on Friday when the highest rate was N1,575 and the lowest quoted was N1,510.
Notwithstanding the gain, cautious optimism continues to dominate the market as experts differ on the exact factors that are driving the development.
Some experts said naira has consistently suffered in the hands of speculators who embark on guesswork to drive the narrative while the CBN often plays catch-up with inadequate tools to curb the excesses of speculators. They attributed what was going on to asymmetric information, which EFEMS seems to address.
Indeed, regardless of EFEMS, the CBN may need to lower the $100,000 threshold for citizens to buy FX on the platform even as more transparency across the fiscal space is needed to build trust.
There are divergent views that lowering the $1,000,000 threshold will expose the market to small-holder traders or end users who may begin to experiment with round-trip transactions and speculation.
A financial analyst, Leke Olushuyi, identified EFEMS as a key driver of the naira’s appreciation in the FX market.
The CBN said the main objective of establishing EFEMS was to enhance transparency, on which the CBN will publish real-time prices and buy/sell orders from the system.
To the question of sustainability, Olushuyi urged caution, saying: “Is this market-driven appreciation or is the naira merely being ‘defended’? Will we see more liquidity in the future? Well, it is fine to speculate and analyse, but I feel it is too early to jump to any conclusion. The EFEMS is barely one week old. Let us see what the future will bring.”
He added that the naira gaining strength in the last week does not translate to sorting out all the challenges confronting the foreign exchange market.
Ade Mohammed, a retired banker, noted that it was too early to make any call. He insisted that the market needs about six months of stability for experts to be definite on the trajectory the naira will thread.
He urged stakeholders to focus less on the foreign exchange market and emphasize other economic fundamentals.
According to him, areas of focus include public revenue, expenditure, imports, exports, productivity, demand, supply, labour, economic strategy, GDP, education, public debt, infrastructure, security and FX reserves, which are also crucial in the determination of the value of naira.
“I cannot claim to know everything about the dynamism of the Nigerian economy, but it does appear we focus too much on the exchange rate as if it is the only determinant of how well an economy is performing. Yes, Nigeria is an import-dependent country, and the dollar is mostly used. Exchange rates reflect different economic variables. A weak currency simply means that some economic components need attention, and if the identified components are fixed, the currency will become stronger.
“If exchange rates are simply a reflection of the economy, it means the right approach to fix the exchange rate crisis is to fix the economy and not try to fix exchange rates. If exchange rates are simply a reflection of the economy, it means the right approach to fix the exchange rate crisis is to fix the economy and not try to fix exchange rates,” he explained.
