On Friday last week, news broke of President Bola Tinubu suspending central bank governor Godwin Emefiele with immediate effect, as investigations into his office and planned financial sector reforms were underway. Coincidentally, during this time, I was writing an article based on my personal experience with accessing Personal Travel Allowance (PTA) for my daughter.
Despite her recent graduation from university, she was required to provide a 3-year tax clearance as per the CBN directive. With over 20 years of banking experience at the highest levels of compliance and after speaking to multiple banks, I couldn’t find any that understood the true application of the CBN directive for someone in my daughter’s situation. A quick search on Twitter revealed hundreds of youths expressing their frustrations with the same experience.
I want to delve a little into the challenges faced in differentiating the spirit and the letters of CBN directives during Godwin Emefiele’s nine-year tenure as governor of the Central Bank of Nigeria, which have affected numerous industries and altered the trajectories of countless lives.
I will also explore the recent operational changes announced by the CBN after the suspension of Emefiele and the subsequent appointment of a new governor, which have brought about significant shifts in the Nigerian Foreign Exchange (FX) Market. These changes aim to address the previous challenges and improve the overall effectiveness of the FX market.
Challenges Faced Under Governor Godwin Emefiele:
During Governor Emefiele’s tenure, challenges arose in the implementation of directives, particularly concerning the Personal Travel Allowance (PTA) and its impact on individuals. The requirements, such as providing a 3-year tax clearance for individuals who recently graduated, lacked clarity and created significant barriers for accessing funds for education and personal travel. The previous foreign exchange market also led to scarcity of fx, haphazard attempts at regulating the fx market with restrictions on personal dollar accounts, preferential allocation to bureau de change and so many other challenges that affected countless lives and raised concerns about the consistency and spirit of the CBN’s directives.
Operational Changes Announced by the CBN after Emefiele’s Suspension
Under the new leadership and President Tinubu’s oversight, the CBN has introduced operational changes that aim to address the previous challenges and improve the overall effectiveness of the FX market.
Let’s explore these operational changes in a way that the average Nigerian can understand:
- Abolishment of Segmentation – A Unified Market:
Previously, the FX market was divided into different segments, creating complexity and inefficiency. The CBN has now consolidated all segments into the Investors and Exporters (I&E) window. This means that the process for foreign exchange transactions has been simplified, and there is now a unified platform for conducting these transactions. Specific applications such as medical expenses, school fees, personal and business travel allowances, and small and medium-sized enterprises (SMEs) will continue to be processed through deposit money banks, ensuring specialised services for essential needs.
Example: Previously, if you wanted to exchange currency for personal travel, you had to go through a separate process from someone who needed foreign exchange for medical expenses. Now, all these transactions can be conducted through the unified Investors and Exporters window, making it simpler and more efficient for individuals and businesses.
- “Willing Buyer, Willing Seller” Model – A Fair Marketplace:
The CBN has reintroduced the “Willing Buyer, Willing Seller” model at the I&E window. This means that all eligible transactions can access foreign exchange through this window. The aim is to promote fairness and equal opportunity for participants, aligning with the principles of a free market. The guidelines outlined in the existing circular will govern operations within this window, ensuring clarity and consistency.
Example: Previously, there were restrictions and preferential treatment in the FX market, leading to unfairness and lack of transparency. With the reintroduction of the “Willing Buyer, Willing Seller” model, individuals and businesses can participate on equal terms, creating a fairer marketplace for everyone.
- Aligned Operational Rate for Government Transactions:
To align government-related transactions with prevailing market rates, the operational rate for these transactions will be based on the weighted average rate of the preceding day’s executed transactions at the I&E window. This ensures a fair valuation and reflects the dynamic nature of the market.
Example: Previously, government transactions might have been conducted at fixed rates that didn’t accurately reflect the market value. With the new operational rate based on the weighted average, government transactions will be aligned with market rates, resulting in a fairer valuation.
- Balanced FX Position Limits – Managing Risk:
The CBN has introduced measures to balance the risk associated with foreign exchange positions. Oversold positions are subject to proscribed trading limits, while short positions can be hedged with Over-The-Counter (OTC) futures, enabling effective risk management. On the other hand, overbought positions have been limited to zero to maintain market stability.
Example: In the past, some individuals or institutions may have taken excessive risks by holding large foreign exchange positions. These measures aim to manage risk by imposing limits on oversold positions and allowing short positions to be hedged with OTC futures, while also preventing the accumulation of excessive positions that could destabilise the market.
- Order-Based Two-Way Quotes – Transparent Trading:
Order-based two-way quotes have been reintroduced in the FX market, creating a transparent and fair trading environment. This means that buyers and sellers openly present their bid and ask prices, promoting price discovery and efficient trading. Additionally, all transactions will be cleared by a Central CounterParty (CCP), ensuring integrity and accountability.
Example: Previously, the FX market may have lacked transparency, with unclear pricing and hidden costs. With the reintroduction of order-based two-way quotes, individuals and businesses can see the bid and ask prices upfront, allowing for better decision-making and fairer transactions.
- Reintroduction of Order Book – Enhancing Transparency and Execution:
The reintroduction of the Order Book provides a transparent view of orders and facilitates seamless execution of trades. Participants can efficiently view and execute orders, contributing to a more transparent and accountable market environment.
Example: The reintroduction of the Order Book means that individuals and businesses can see all the pending orders for foreign exchange, allowing them to understand the market depth and execute trades more efficiently. This enhances transparency and accountability in the FX market.
Foreign investors closely monitor operational changes in the central bank’s policies and regulations. The recent reforms announced by the CBN are likely to attract foreign investors’ attention, as they signal a commitment to improving the Nigerian FX market’s integrity, transparency, and fair competition. A more unified and transparent market, coupled with a fairer marketplace and effective risk management measures, can foster investor confidence and encourage greater foreign direct investment (FDI) inflows.
Moreover, the long-term effects of these changes can be far-reaching. By addressing previous challenges and implementing measures that promote fairness and transparency, the Nigerian FX market becomes more attractive to foreign investors seeking stable and predictable environments for their investments. This can lead to increased capital inflows, job creation, and overall economic growth.
However, it is crucial for the CBN to continue addressing the challenges faced during Governor Emefiele’s tenure, particularly in the implementation of directives like the Personal Travel Allowance, by providing clarity, consistency, and effective communication. This commitment to improving the understanding and application of CBN directives will further enhance the confidence of foreign investors and ensure that policies align with the broader objectives of economic stability and growth.
In conclusion, the operational changes announced by the CBN hold the potential to reshape the Nigerian FX market, benefiting individuals, businesses, and foreign investors. These changes, coupled with ongoing efforts to address challenges and improve communication, can pave the way for a more inclusive, transparent, and attractive investment environment in Nigeria.
