In a significant move aimed at reforming Nigeria’s foreign exchange market, the Central Bank of Nigeria (CBN) has announced the discontinuation of the ±2.5% cap spread on interbank foreign exchange transactions. The circular, dated February 8 and signed by CBN’s Director of Financial Markets, Omolara Omotunde Duke, also highlights the removal of restrictions on the sale of interbank proceeds.
The directive is aligned with the CBN’s objectives to foster a market-based price discovery system, as emphasized in the ongoing FX market reforms.
The CBN aims to promote a market-based price discovery system through these reforms.
The central bank discontinues any cap on the spread on interbank FX transactions and lifts restrictions on the sale of interbank proceeds.
Authorized dealers are instructed to conduct their FX transactions on a “Willing Buyer and Willing Seller” basis while adhering strictly to high ethical standards, including transparency and appropriate price disclosures.
All executed transactions must be promptly recorded on relevant treasury systems and reported to market authorities as stipulated.
Background Information:
Previously, in a circular issued on August 9, 2023, the CBN directed an exchange rate cap spread of ±2.5% of the previous day’s closing rate for International Money Transfer Operators (IMTOs) and banks.
However, a circular released on January 31 removed the exchange rate cap for IMTOs, reflecting the CBN’s commitment to market liberalization.
The move is in line with the CBN’s revised guidelines for the operation of the Nigerian Inter-bank Foreign Exchange Market released in June 2016.
Notably, the 2016 guidelines prohibited the sale of inter-bank funds to Bureau-de-Change operators. With the latest directive, this guideline is effectively discontinued, allowing authorized dealers in the inter-bank FX market to sell proceeds to BDC operators and other willing buyers outside the market.
Implications:
The discontinuation of the ±2.5 per cent cap spread and the removal of restrictions on interbank proceeds sale signal a significant shift towards a more liberalized and transparent FX market in Nigeria.
Market participants can now engage in FX transactions with increased flexibility, leading to improved liquidity and efficiency in the foreign exchange market.
This move underscores the CBN’s commitment to implementing reforms aimed at promoting market dynamism and aligning with global best practices in FX market operations.
The removal of these restrictions is expected to positively impact Nigeria’s economy, facilitating smoother FX transactions and supporting economic growth initiatives.
