On Wednesday, the Central Bank of Nigeria (CBN) directed all commercial banks to sell forex freely at market-determined rates.
The market rate now operates on a “willing buyer, willing seller” arrangement with the new policy that places the country’s currency on ‘free-floating exchange status’.
A free-floating exchange rate is a situation where the government allows the exchange rate to be determined purely by market forces and there is no provision for the central bank to influence the external value of the exchange rate.
The CBN has collapsed all segments in the FX market into the investors’ and exporters’ (I & E) window—meaning that all eligible FX transactions in the market shall only be done via the I & E window, making all other windows cease to exist.
How do I & E function?
The I & E market functions by a willing buyer, willing seller system, where an entity with demand for FX seeks out another entity with FX to sell at an agreed price through an authorised dealer.
What is a willing buyer, willing seller model?
This model allows for rates that are mutually agreed to by both parties—buyer and seller.
Business Travel Allowance (BTA), Personal Travel Allowance (PTA), medical and school fees and other invisible FX transactions are continued to be accessed through commercial banks at the prevailing market rate.
What is the application process for this new policy?
There are no changes in the application process. All applications shall be through the banks and all documentation requirements remain the same.
What are government-related transactions?
These include transactions with ministries, departments and agencies (MDAs) of government.
What are order-based two-way quotes?
This is a two-way quote trading in which all transactions are trade backed.
How will the order book ensure transparency and seamless transactions?
The order book is an electronic trading system where demand can be matched to supply on any given trading day and is visible to the entire market.
Can the “43 non-eligible items” access FX at the I & E window?
The status quo remains on the “43 non-eligible items”. The items are not permitted to be funded from the I & E window.
Editor Note: This article was prepared from CBN’s materials on the new policy on I & E window FX market operations to educate our audience and readers.