5 Key CBN Circulars that Stabilized the FX Market: A Comprehensive Analysis

In the past few weeks, the Nigerian economy has been facing a significant challenge with the precipitous depreciation of the Naira against the US dollar.

However, the Central Bank of Nigeria (CBN) has recently taken a series of measures to bring liquidity and stability to the foreign exchange (FX) market, resulting in a gain of 4.49 percent against the dollar in just seven days of trading.

In this article, we will take a closer look at the five key circulars issued by the Central Bank of Nigeria that have played a crucial role in calming the FX market and promoting economic growth.

Removal of the cap on the spread in interbank foreign exchange transactions:

In a circular dated February 8, 2024, the CBN announced the removal of the ±2.5 percent cap on the spread in interbank foreign exchange transactions.

This move aimed to promote a market-based price discovery mechanism and enhance transparency in the foreign exchange market.

Discontinuation of the fixed exchange rate regime:

Another significant step taken by the Central Bank of Nigeria was the discontinuation of the fixed exchange rate regime.

This move allowed the market to determine the value of the Naira based on supply and demand dynamics, which has proven to be a more effective way to stabilize the foreign exchange market.

Encouragement of International Money Transfer Operators (IMTOs):

To further improve the liquidity of the foreign exchange market, the Central Bank of Nigeria issued a circular on January 31, 2024, removing the allowable limit of exchange rates quoted by the International Money Transfer Operators (IMTOs).

This move was aimed at encouraging more foreign currency inflows into the Nigerian economy.

Increase in daily turnover on the official window:

The Central Bank of Nigeria’s efforts to stabilize the foreign exchange market have also resulted in an increase in daily turnover on the official window.

On February 7, 2024, the daily turnover reached $72.33 million, an 85.27 percent increase compared to the previous day.

Improved transparency and ethical standards in foreign exchange dealings:

The Central Bank of Nigeria has also emphasized the importance of maintaining high ethical standards and transparency in foreign exchange dealings.

Authorized dealers are expected to adopt appropriate price disclosures and ensure transparency in transactions, which is crucial for building confidence in the new system.

In conclusion, the Central Bank of Nigeria’s recent measures to stabilize the foreign exchange market have been effective, resulting in a 4.49 percent gain of the Nigerian Naira against the US dollar in just seven days of trading.

These measures, including the removal of the cap on the spread in interbank foreign exchange transactions, discontinuation of the fixed exchange rate regime, encouragement of International Money Transfer Operators, increase in daily turnover on the official window, and improved transparency and ethical standards in foreign exchange dealings, have played a crucial role in calming the FX market and promoting economic growth.