EFEMS transparency fuels naira demand in parallel market

…Analysts say black market needs to be sanitised

The transparency in the Central Bank of Nigeria (CBN)’s newly introduced Electronic Foreign Exchange Matching System (EFEMS) has forced currency speculators and illicit market operators to look elsewhere, pushing up demand in the parallel market where activities mostly go under the radar, analysts have said.

Apart from illicit currency traders, legitimate buyers who cannot meet EFEMS requirements have also resorted to the parallel market, fuelling demand in the black market.

“Most people who have no business in the official market now move to the parallel market to seek refuge. This could explain the rising demand in the parallel market,” said Ike Ibeabuchi, an emerging markets analyst, said.

Read also: Naira gains across FX markets as demand moderates

“Fraudsters, Ponzi scheme entities and illicit traders, including unscrupulous politicians, would rather prefer to go to the parallel market than the EFEMS market where their activities can easily be monitored.”

On November 26, 2024, the CBN issued a directive requiring all banks operating in the interbank FX market to adopt the Bloomberg BMatch system for trading. The platform, which became operational on December 2, 2024, aims to enhance transparency and operational efficiency in Nigeria’s FX market.

The CBN also issued comprehensive guidelines for the operations of the interbank foreign exchange (FX) trading system via EFEMS, pegging the minimum tradable amount at $100,000, with incremental clip sizes of $50,000.00, to promote transparency and efficiency in the FX market.

Omolara Duke, the CBN’s director of the financial markets department, announced this in a circular sent to all banks on Tuesday. According to Duke, the EFEMS initiative is designed to ensure “transparent, fair, and efficient FX trading, minimise counterparty risks, and enforce compliance with CBN regulations.”

Between December 2 when the new electronic trading platform commenced and December 10, 2024, the naira recorded N147.69 gain over the dollar in the official FX since the commencement of trading on the Electronic Foreign Exchange Matching System (EFEMS).

The naira appreciated to N1,515 per dollar in the parallel market last Friday, December 6, 2024, as traders offloaded dollars in response to the CBN’s new forex framework, before losing five-day winning streak on Monday.

The local currency gained 0.85 percent or N13 as the dollar was quoted at N1,532 on Thursday compared to N1,545 quoted on Wednesday in the Electronic Foreign Exchange Matching System (EFEMS), data from the CBN showed.

The naira traded at N1,680 per dollar on Thursday at the parallel market, gaining N30, compared to N1,715 on Wednesday, due to moderate demand amid activities of speculators in the black market.

Read also: Naira records second fall in official market since EFEMS commencement

A Bureau De Change (BDC) operator, who spoke on the condition of anonymity, said the new FX policy of the CBN shook the market and those who could not meet their needs in the official market have rushed to the black market.

Adamu Aliero, another BDC operator, said several speculators have moved fully to the parallel market due to the strict operations of the EFEMS market.

The Nigerian foreign exchange market continues to grapple with instability, primarily driven by inadequate dollar supply, according to an analyst, who highlighted that while issues like documentation requirements and speculative activities affect the market, supply challenges remain the elephant in the room.

Other Reasons for Parallel Market Demand

Speaking with BusinessDay, Ayokunle Olubunmi, head of financial institutions ratings at Agusto Consulting, said: “If there were enough dollars in circulation, the influence of the black market would diminish significantly, and even speculators would pull back. The real issue is the imbalance between demand and supply.”

Before 2015, accessing foreign exchange was less contentious due to the sufficient availability of dollars, which kept the divergence between official and black market rates minimal. “Back then, nobody worried about whether someone went to the black market or the official market because the supply was adequate,” Olubunmi added.

In recent weeks, the CBN has increased its intervention in the FX market, which has contributed to a slight appreciation of the naira. Analysts believe this trend can continue if the CBN maintains its strategy of injecting dollars into the market. However, without sustained efforts, the market could regress.

“The CBN’s approach has changed significantly,” Olubunmi continued. “While they no longer act as the primary FX dealer, they remain a key participant. They intervene discreetly by trading at prevailing market rates without setting fixed prices, allowing supply and demand to determine the outcome.”

The introduction of an electronic trading platform has also been a game-changer for the FX market. Transactions, which were previously conducted via phone calls and manual reporting, are now executed online, enhancing efficiency and transparency.

Despite these advancements, Olubunmi emphasised that stabilising the naira depends on addressing the supply shortfall. “The most important thing is ensuring sufficient dollar supply. Once that happens, the black market will naturally lose its relevance,” he said.

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According to him, the coming weeks will reveal whether the CBN can sustain its interventions to meet the market’s growing demand and achieve lasting stability for the naira.

Muda Yusuf, CEO of the Centre for the Promotion of Private Enterprise (CPPE), said the CBN is making strides in stabilising the foreign exchange market, but challenges posed by the unregulated black market remain significant, stressing the complexities of addressing the persistent volatility in the FX market.

“The measures taken by the CBN are yielding some positive results, but it is a work in progress,” Yusuf said. “Speculators and manipulators in the market are constantly devising new tricks, so this must be a continuous effort.”

The lack of regulation in the black market has compounded the difficulty of achieving exchange rate convergence, a key policy goal of the CBN. “Trying to converge with a market that is totally unregulated and unstructured is a problem for everyone,” Yusuf explained.

He highlighted the role of illegitimate activities driving the black market, including money laundering and other illicit transactions that bypass the official market. “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 noted.

Yusuf also pointed out the challenge of cleaning up the FX market, which is rife with legacy issues and manipulative practices.

“There are still many unscrupulous players in the system. In most economies, you cannot play around with foreign currency as you do here. Regulatory frameworks and enforcement are much stricter elsewhere,” he said.

The interplay between the official market and the black market adds to the complexity, with some individuals exploiting the system for profit. “Unfortunately, there are instances where players in the official market have linkages with black market operators. These connections perpetuate volatility,” Yusuf stated.

Despite these hurdles, Yusuf remains optimistic about the progress being made. “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,” he said.

Read also: Nigeria foreign debt rises to N30trn on naira devaluation

Olayemi Cardoso, governor of the CBN, said in November 2024 that average daily turnover in the Nigerian Autonomous Foreign Exchange Market increased by 226 percent in the 1st half of the year when compared to the same period in 2023. Foreign portfolio inflows have increased by over 72 percent during this period, while foreign exchange reserves have risen from $32 billion in May 2023 to over $40 billion today. This represents the equivalent of eight months’ import cover and marks the highest reserve level in nearly three years, he said.