How CBN restored transparency in FX market

The foreign exchange market in Nigeria has witnessed a remarkable transformation, characterised by increased stability and transparency, following recent policy measures implemented by the Central Bank of Nigeria (CBN).

These measures, which include the introduction of the Electronic Foreign Exchange Matching System (EFEMS), have not only restored investors’ confidence but have also contributed to strengthening the naira against the US dollar, marking a significant milestone in the country’s economic reforms.

The EFEMS initiative, which was officially introduced on October 3, 2024, represents a bold move by the CBN to address longstanding issues of speculation and lack of transparency in the foreign exchange market. This system, specifically designed for use by authorised dealers in the Nigerian Foreign Exchange Market (NFEM), aims to create a more structured and accountable trading environment. After a successful two-week test run in November, EFEMS became fully operational on December 2, 2024. The results have been immediate and tangible.

According to data obtained from the CBN, the naira appreciated by N125 against the US dollar within a month of EFEMS’ launch, moving from N1,660/$ on December 2, 2024, to N1,535/$ on January 3, 2025.

Olayemi Cardoso, governor of the CBN has been a vocal advocate for these reforms, highlighting their importance in fostering economic stability. “Over the past year, we have undertaken critical reforms to unify Nigeria’s exchange rate, eliminating distortions and restoring transparency,” Cardoso said. He emphasised that this unification has allowed the CBN to clear outstanding foreign exchange obligations, thereby providing businesses across various sectors, including manufacturers and airlines, with the confidence to plan and invest in the future. Cardoso also underscored the role of EFEMS in further enhancing the functionality of the foreign exchange market, noting that similar systems have proven effective in other markets.

Despite these advancements, the CBN’s efforts are not standalone. Governor Cardoso has repeatedly called on Nigerian banks to assume greater responsibility in their roles as intermediaries and market makers. He argued that a foreign exchange market defined solely by the CBN’s buying or selling of dollars is insufficient for a dynamic economy like Nigeria’s. “Now is the time for banks to step up to their intermediation and market-making responsibilities, providing customers with the right solutions to run their businesses and manage risks effectively,” Cardoso stated.

In line with this directive, the CBN issued a policy on November 26, 2024, mandating all banks operating in the interbank FX market to adopt the Bloomberg BMatch system for trading. This platform, which became operational on December 2, 2024, aims to further enhance transparency and operational efficiency in the foreign exchange market.

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To ensure the seamless operation of EFEMS, the CBN has established comprehensive guidelines. The minimum tradable amount has been set at $100,000, with incremental clip sizes of $50,000 to promote transparency and efficiency. Omolara Duke, director of the CBN’s financial markets department, outlined these guidelines in a circular distributed to all banks. “The EFEMS initiative is designed to ensure transparent, fair, and efficient FX trading, minimise counterparty risks, and enforce compliance with CBN regulations,” Duke stated. Violations of these guidelines could result in severe penalties, including suspension or revocation of access to the EFEMS platform.

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. “The black market accommodates all sorts of activities, including illegal ones. 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.

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.

The journey towards a fully transparent and stable foreign exchange market in Nigeria is far from over. While the challenges are significant, the progress achieved so far offers a glimpse of the possibilities ahead. As Yusuf aptly summarised, “What is important is that progress is evident, but addressing these dysfunctions will take time. The black market needs to be sanitised to ensure a more stable and transparent FX system.”