With effect from 24 April 2017, the Central Bank of Nigeria (CBN) will allow investors to engage in foreign exchange trading at rates set by the buyers and sellers. The move will enable the CBN to increase the amount of dollars available in the continent’s biggest economy. As set out in the recent circular, the new trading system will be available to businesses and individuals who require dollars for the purpose of repaying loans, paying dividends, repatriating capital or settling trade-related obligations. Whilst the CBN will not provide the funds, it will stabilise the market by stepping in to buy or sell in order to keep the market orderly.
Nigeria has recently experienced a shortage in dollar supply since the price of crude oil –the country's main source of hard currency – plunged three years ago. Nigeria has at least five exchange rates: the official rate as set by the CBN, parallel market, which is the informal foreign exchange market between traders who do not fall in the categories recognised in section 7 of the Foreign Exchange (Monitoring and Miscellaneous Provisions) Act of 1995, a rate for Muslim pilgrims going to Saudi Arabia, a rate set by licensed exchange bureaus as well as a rate for foreign travel and school fees. In June 2016, the CBN lifted a temporary peg on the currency, but to protect its low foreign exchange reserves which were at risk, it introduced a rather complex exchange rate policy that resulted in different buyers paying different rates for dollars. This has resulted in investors struggling to price naira assets appropriately, which has hindered hard currency inflows.
With the recent news that Nigeria’s economy is rebounding and is no longer in a recession, the new foreign exchange trading regime adds to the optimism for investors. Foreign investors are again able to participate in trading in the foreign exchange market.