The Central Bank of Nigeria (CBN) is set to introduce an electronic foreign exchange (FX) matching system to address persistent distortions in the naira-to-dollar exchange rate.
CBN governor Olayemi Cardoso announced the initiative during the Bankers’ Committee Annual Dinner held on November 29, 2024, at the Eko Hotel, Lagos.
The system, he said, would serve as a tool for price discovery, ensuring the naira’s exchange rate reflects actual market dynamics rather than the actions of “desperate buyers.”
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“The current USD exchange rate reflects the price that the most desperate buyers are willing to pay, and this does not represent the true market value of the naira,” he stated.
The FX matching system is intended to correct this imbalance, ensuring rates are determined by real supply and demand.
The introduction of the electronic FX matching system is part of a broader reform agenda by the CBN to unify Nigeria’s exchange rates and eliminate inefficiencies in the FX market. Over the past year, the apex bank has undertaken measures such as settling outstanding foreign exchange obligations, which have reportedly improved confidence among businesses, particularly manufacturers and airlines.
According to Cardoso, the system will enable the CBN to monitor FX transactions more effectively and intervene only when necessary, thus fostering transparency and stability.
“The FX matching system will correct distortions by creating a more transparent and efficient market where exchange rates reflect actual supply and demand,” he said.
Cardoso also criticized what he described as “disinformation” about a persistent demand-supply gap in the FX market, which he believes has fueled unnecessary panic. He argued that the perception of an unmanageable gap has been exaggerated, leading to speculative distortions.
“Disinformation about a supposed demand-supply gap has created panic that is unwarranted,” he noted, adding that the new system would ensure rates are driven by genuine market activities.
The CBN governor stressed the critical role that commercial banks must play in ensuring the success of these reforms. He argued that a functional FX market cannot depend solely on the Central Bank’s periodic interventions and called on banks to embrace their responsibilities as market intermediaries.
“An FX market defined solely by when and how the Central Bank buys or sells dollars is inadequate for the needs of a dynamic economy like Nigeria’s,” Cardoso said.
He urged banks to offer tailored solutions to businesses and individuals, enabling them to manage risks and meet their operational needs effectively.
The electronic FX matching system, which has been successfully adopted in other countries, is expected to roll out in the coming months. Cardoso expressed optimism that the reforms would encourage long-term investments and bolster Nigeria’s economic growth.
“The introduction of this system marks a significant step toward achieving transparency and stability in Nigeria’s foreign exchange market,” he stated.
A Road to Recovery?
The CBN’s latest initiative comes at a critical juncture for Nigeria’s economy, which has grappled with a dwindling currency, rising inflation, and diminishing investor confidence.
This move is the latest in a series of attempts by the apex bank to stabilize Nigeria’s beleaguered foreign exchange market. Over the years, successive CBN governors have implemented a range of policies to curb volatility and narrow the gap between the official and parallel market rates.
From multiple exchange rate windows to the introduction of the Investors’ and Exporters’ (I&E) window, and most recently, the unification of exchange rates, the CBN’s efforts have largely fallen short of expectations. The naira has continued its downward spiral, trading at record lows in both official and black markets.
The FX matching system, though touted as a game-changer, raises questions about its potential impact on the naira’s value. There is concern whether the system will expose an even grimmer reality about the currency’s worth.
Many believe that the FX matching system, by removing speculative distortions, may reveal that the naira is even more undervalued than it appears under the current market conditions.
While the electronic FX matching system has been successfully implemented in other markets, Nigeria’s unique economic circumstances pose significant hurdles.
The CBN has not clarified whether it expects the naira to strengthen or weaken once the electronic system is fully operational. However, given the recent uptick in Nigeria’s foreign reserves, which has reached $40 billion according to the CBN, the naira is expected to see gains.
Cardoso said he remains optimistic that the new system will create a functional and transparent FX market, restore confidence, and encourage long-term investments. However, due to the failure of past interventions to stem the naira’s decline, many Nigerians are cautiously waiting to see whether this latest effort will break the cycle or merely prolong it.