From N1,520 to N1,400 naira gains after CBN removed IMTOS FX cap

Nigeria’s currency is recovering from its losses against the United States dollar at the parallel and official markets after the Central Bank of Nigeria (CBN) removed foreign exchange (FX) cap from the International Money Transfer Operators (IMTOs), and ordered banks to sell excess dollars.

Naira appreciated by 8.57 percent in less than 24 hours to N1,400 on Thursday after tipping at N1,520 per dollar on Wednesday at the parallel market, commonly called black market, data collated from different street traders revealed.

The CBN removed the cap on the allowable limit of -2.5 percent to +2.5 percent around the previous day’s closing rate for the IMTOs. This adjustment signifies a shift in the regulatory framework, providing IMTOs with more flexibility in determining exchange rates.

Read also: Naira gains as banks offload dollars into FX market

This comes after the banking and financial institutions regulator on Wednesday announced limits on how much banks can hold in foreign currencies and expressed concern about the growth of forex exposures on their balance sheets after the local currency tumbled against the U.S. dollar.

Nigeria’s currency today is the cheapest and best value of any in Africa, or any of the emerging or frontier markets – according to FIM Partners currency model

“Globally only the Japanese yen is cheaper (and that’s a pretty unique story). The model doesn’t have Lebanon/Venezuela/Zimbabwe, said Charlie Robertson, head of macro-strategy, FIM Partners, UK.

One of the street traders told BusinessDay that there is enough dollars in the market due to the CBN’s new forex policy and that demand has reduced as the Chinese, who are major consumers of dollars, have gone on holiday.

In a new circular (TED/FEM/FPC/GEN/001/003) dated January 31, 2024, the CBN announced a significant change in the regulations governing exchange rate quotes by International Money Transfer Operators.

Previously, IMTOs were required to quote rates within an allowable limit of -2.5 percent to +2.5 percent around the previous day’s closing rate of the Nigerian foreign exchange market, according to the circular TED/FEM/PUB/FPC/001/009 dated September 13, 2023.

Read also: Anger, misery rise across Nigeria as naira freefall worsens

In a move aligning with the CBN’s commitment to liberalize the Nigerian foreign exchange market, the new circular permits IMTOs to quote exchange rates for naira payout to beneficiaries based on prevailing market rates at the Nigerian foreign exchange market. This is to be done on a willing seller, willing buyer basis.

The circular, signed by Hassan Mahmud, director of the trade and exchange department, supersedes the previous circular (TED/FEM/PUB/FPC/001/009) issued on September 13, 2023.

All Authorized dealers, International Money Transfer Operators, and the general public are advised to take note of this development and ensure compliance with the revised regulations. The CBN’s decision reflects ongoing efforts to adapt and enhance the dynamics of the Nigerian foreign exchange market, the circular stated.

“The reason for the removal of the cap is to incentivize the IMTOs to transparently transfer their receipt into the country,” Aminu Gwadabe, president, Association of Bureau De Change Operators of Nigeria (ABCON), said.

He said the IMTOs were hitherto not remitting the actual remittance proceeds into the official market but mostly domicile it in the jurisdictions of receipts at parallel market rates.

“It is hoped with the removal of the cap on IMTOs proceeds, the diversion from the official markets of the proceeds will be reduced drastically or eliminated.

The likely impacts will be an increase in liquidity in the market which will influence exchange rate and stability positively,” he said.

Gwadabe said, “already we have started seeing the local currency appreciating against the dollar in the parallel market by about 6 percent from a N1520 yesterday to N1420/$ this afternoon in the market.

“We therefore call on the management of the apex bank to sustain the tempo. There is the urgent need in the immediate time to consider the effective transmission mechanism roles of the BDCs through their inclusion as the third leg of the market,” he said.

The pressure on the FX market eased on Thursday as the naira recovered after commercial banks offloaded dollars into the official market, in response to 24 hours given by the CBN.

This was seen as the volume of dollar transactions by willing buyers and willing sellers, consisting of banks, exporters and investors, increased by 85.36 percent.

The daily FX market turnover increased to $134.07 million on Wednesday from $72.33 million recorded on Tuesday at the official market.

Consequently, Naira gained 1.85 percent as the dollar was quoted at N,‪1455.59‬ on Wednesday compared to N1,482.57 quoted on Tuesday at the Nigerian Autonomous Foreign Exchange Market (NAFEM), data from the FMDQ indicated.

Also, the intraday high appreciated by 1.46 percent to N1,509 on Wednesday as against N1,531 quoted on the spot on Tuesday. The intraday low steadied at N789 per dollar.

Naira appreciation refers to an increase in the value of the Nigerian Naira compared to other currencies. For individual households, it generally means that imported goods may become more affordable, potentially leading to lower prices for imported products, according to analysts.

Businesses, especially those that rely on importing raw materials or goods, may experience reduced production costs. However, businesses relying on exports might face challenges, as their products may become more expensive for foreign buyers, analysts said.