CBN and new measures to boost forex supply

The nation’s financial markets came alive last week following positive sentiments and renewed confidence generated by the new measures announced by the Central Bank of Nigeria, CBN to boost foreign exchange inflow into the country.

The stock market posted record gains, as the total value of shares listed on the NGXchange, or market capitalization, rose by N998 billion to N32.662 trillion on Wednesday when the measures were announced.

In the official forex market, the Investors and Exporters, I&E window, the new measures triggered increased transactions, prompting the exchange rate to rise, and converged with the parallel market exchange rate around N756 per dollar within one week of the new measures.

Presidential pronouncement

The measures announced by the CBN, were aimed at injecting new life into the official forex market, represented by the Investor and Exporters, I&E window, and were largely inspired by the pronouncement of President Bola Tinubu that CBN must work towards a unified exchange rate.

“The Central Bank must work towards a unified exchange rate. This will direct funds away from arbitrage into meaningful investment in the plant, equipment and jobs that power the real economy”, the President said in his inaugural speech.

Consequently, the CBN in a circular signed by Director, Financial Markets, Dr. Angela Sere-Ejembi, unveiled “Operational Changes to the Foreign Exchange Market.”

One Official Forex window

“Abolishment of segmentation. All segments are now collapsed into the Investors and Exporters (I&E) window. Applications for medicals, school fees, Business Travel Allowance/Personal Travel Allowance, BTA/PTA, and Small, and Medium Enterprises, SMEs would continue to be processed through deposit money banks, the CBN said.

This means all eligible FX transactions in the market shall only be done via the I&E window, all other windows cease to exist.

Willing Buyer, Willing Seller

The CBN also announced, “Re-introduction of the “Willing Buyer, Willing Seller” model at the I&E Window. All eligible transactions are permitted to access foreign exchange at this window.”

The I & E market functions by a willing buyer, willing seller system, where an entity with demand for FX seeks out another entity with FX to sell at an agreed price through an authorised dealer.

A willing buyer, willing seller system model means that exchange rates are mutually agreed by both parties.

Government-Related Transactions

According to the apex bank, “The operational rate for all government-related transactions shall be the weighted average rate of the preceding day’s executed transactions at the I&E window, calculated to two (2) decimal places.”

Government related transactions are transactions with Ministries, Departments and Agencies (MDAs).

On the weighted average rate, and how is will calculated to two decimal places, the CBN explained, “This is a summation of volume of FX traded multiplied by the various rates at which the deals are consummated, divided by total volume of trade.”