How CBN enhanced transparency in FX market

Following recent policy actions taken by the Central Bank of Nigeria (CBN), the Nigerian foreign currency market has undergone a dramatic transition marked by more stability and transparency.

A major turning point in the nation’s economic reforms, these actions—which include the implementation of the Electronic Foreign Exchange Matching System (EFEMS)—have not only helped to rebuild investor confidence but have also strengthened the value of the naira relative to the US dollar.

With the official launch of the EFEMS project on October 3, 2024, the CBN took a daring step to address persistent problems with speculation and opaqueness in the foreign currency market. In order to establish a more organized and responsible trading environment, this system was created especially for use by authorized dealers in the Nigerian Foreign Exchange Market (NFEM). EFEMS went into full operation on December 2, 2024, following a successful two-week test run in November. The effects have been noticeable and immediate.

Data from the CBN indicates that within a month after EFEMS’ introduction, the value of the naira increased by N125 compared to the US dollar, from N1,660/$ on December 2, 2024, to N1,535/$ on January 3, 2025.

The CBN’s governor, Olayemi Cardoso, has been an outspoken supporter of these measures, emphasizing their value in promoting economic stability. “To unify Nigeria’s exchange rate, we have implemented crucial reforms over the past year, removing distortions and reestablishing transparency,” Cardoso stated. He emphasized that the CBN has been able to settle its outstanding foreign exchange obligations as a result of this unification, giving companies in a variety of industries, such as manufacturers and airlines, the assurance they need to make future plans and investments. Cardoso also emphasized EFEMS’s contribution to improving the foreign exchange market’s operation, pointing out that comparable systems have worked well in other markets.

Notwithstanding these developments, the CBN’s work is not independent. Nigerian banks have been consistently urged by Governor Cardoso to take on more responsibility in their capacities as market makers and intermediaries. He maintained that a dynamic economy like Nigeria’s cannot be adequately served by a foreign exchange market that is only defined by the CBN’s purchases and sales of dollars. “Banks need to take on their intermediation and market-making duties now in order to give their clients the best solutions for managing risks and operating their businesses,” Cardoso said.

On November 26, 2024, the CBN released a guideline requiring all banks involved in the interbank foreign exchange market to use the Bloomberg BMatch system for trading in accordance with this direction. The goal of this platform, which went live on December 2, 2024, is to improve the foreign exchange market’s operational efficiency and transparency.

The CBN has put in place thorough rules to guarantee the smooth running of EFEMS. To encourage efficiency and transparency, a minimum tradable quantity of $100,000 has been established, with increasing clip sizes of $50,000. In a circular sent to all banks, Omolara Duke, director of the CBN’s financial markets division, described these rules. “The EFEMS initiative is designed to ensure transparent, fair, and efficient FX trading, minimise counterparty risks, and enforce compliance with CBN regulations,” Duke stated. Serious consequences, such as suspension or revocation of access to the EFEMS platform, could follow violations of these rules.

Muda Yusuf, CEO of the Centre for the Promotion of Private Enterprise (CPPE), acknowledged the progress made by the CBN but also highlighted the challenges posed by the unregulated black market. According to Yusuf, while the measures taken by the CBN are yielding positive results, achieving exchange rate convergence remains a complex task.

“Speculators and manipulators in the market are constantly devising new tricks, so this must be a continuous effort,” Yusuf noted. He pointed out that the black market’s lack of regulation has compounded these challenges, accommodating illicit activities such as money laundering. “A wide range of activities, including illicit ones, are supported by the black market. These are transactions that cannot go through the official window, and this drives its operations,” Yusuf explained.

Yusuf also highlighted systemic challenges within the FX market, including legacy issues and manipulative practices. “In most economies, you cannot play around with foreign currency as you do here. Regulatory frameworks and enforcement are much stricter elsewhere,” he observed. The interplay between the official and black markets exacerbates these challenges, with some individuals exploiting the system for personal gain. “Unfortunately, there are instances where players in the official market have linkages with black market operators. These connections perpetuate volatility,” Yusuf stated. However, he remains optimistic about the progress being made, emphasising that the black market needs to be sanitised to ensure a more stable and transparent FX system.

In addition to EFEMS, other reforms have bolstered the naira’s stability. Governor Cardoso revealed that the average daily turnover in the Nigerian Autonomous Foreign Exchange Market increased by 226 percent in the first half of 2024 compared to the same period in 2023. Foreign portfolio inflows have risen by over 72 percent during this time, while foreign exchange reserves climbed from $32 billion in May 2023 to over $40 billion—the highest reserve level in nearly three years. These reserves now represent eight months’ import cover, a critical indicator of economic resilience.

Looking ahead, the naira-dollar exchange rate, which stabilised in the official FX market between July and December 2024, is projected to maintain its stability through 2025. Yusuf attributed this optimism to several factors, including increased foreign reserves, robust diaspora remittances, and inflows from International Money Transfer Operators (IMTOs). Additional measures, such as the $2 billion Eurobond proceeds, a $500 million domestic dollar bond, and the clearance of $7 billion in legacy forex obligations by the CBN, have further strengthened the apex bank’s capacity for market interventions.

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Another significant development is the operationalisation of the Dangote and Port Harcourt refineries. These facilities are expected to ease demand pressure on forex for fuel imports, reducing dependency on external currency flows and bolstering the naira. Yusuf also noted a gradual recovery in the non-oil export sector, which is anticipated to contribute positively to forex inflows.

The EFEMS guidelines outline the roles and responsibilities of participants, which include all authorised dealer banks licensed by the CBN and other approved entities. The system is currently limited to transactions involving the naira and the US dollar, although other currency pairs may be introduced as directed by the CBN. The apex bank reserves the right to monitor all transactions, publish trade data, and impose penalties for non-compliance. Dispute resolution mechanisms are also in place, ensuring that disagreements are first addressed bilaterally and, if necessary, escalated to higher authorities.