When in April 2017, the Central Bank of Nigeria (CBN) established the Investors and Exporters’ (I&E) Foreign Exchange window, also known as the Nigeria Autonomous Foreign Exchange (NAFEX) window, the move was in response to what was then probably the most serious forex crisis that the country had faced in decades. The apex bank stated at the time that the window would boost liquidity in the forex market and ensure timely execution and settlement for eligible transactions.
According to the circular is- sued by the regulator at the time, eligible transactions to be covered under the window included invisible transactions, such as loan repayments, loan interest payments, dividends/income remittances, capital repatriation, management service fees and consultancy fees. Also covered were software subscription fees, technology transfer agreements, personal home remittances, bills for col- lection and any other trade-re- lated payment obligations at the instance of the customer, among others. The CBN’s statement said: “Supply of foreign currency to the new window shall be through portfolio investors, ex- porters, authorized dealers and other parties with foreign currency to exchange to naira.
“The CBN shall also be a market participant at the window to promote liquidity and professional market conduct.” To provide price discovery to the market, the CBN said the FMDQ would be charged with polling buying and selling rates and other relevant information from the major participants in the market to provide participants with the requisite price discovery, with the indicative market depth until the market migrates to the FX Trading systems. As part of the operational re- quirements of the window, the CBN said the exchange rates of the transactions would be as agreed between authorized deal- ers and their counterparties, adding that it reserved the right to intervene as a buyer or seller, as it deemed fit, at the window. As analysts have pointed out, the establishment of the window at that time proved quite effec- tive in helping to attract inflows thereby enabling the CBN to support the naira which was then headed for a free fall.
Spike in inflow
Indeed, within a year of its establishment, the I&E window had attracted an inflow of $41.97 billion, according to CBN data. In June last year, the apex bank announced that the window attracted over $50 billion in investments to the country within three years. It emphasised that the thrust of its exchange rate management strategy is to allow the market system to determine the exchange rate parity in an efficient manner devoid of the activities of speculators and rent-seekers, adding that the objectives of its exchange rate policy in Nigeria include preservation of the naira’s value, maintaining a favourable external reserves position and ensuring external balance without compromising the need for internal balance and the overall goal of macroeconomic stability.
Exit of FDI
However, with the lingering effects of the 2020 Covid-19 cri- sis as well as negative developments triggered by Russia’s invasion of Ukraine in February last year, leading to decline in Foreign Portfolio Investment (FPI) and Foreign Direct Investment (FDI) in emerging economies such as Nigeria, inflow at the I&E window has not been as high as it used to be when it was newly established.
For instance, data released by the National Bureau of Sta- tistics (NBS) shows that FDI plunged by 33 per cent to $462.91 million at the end of last year, the lowest level since 2017. According to NBS, the total capital importation into Nige- ria stood at $1 billion in Q4 2022, lower than $2.1 billion recorded in Q4 2021, indicating a decrease of 51.51 per cent. Thus, the exit of foreign in- vestors meant that forex supply at the I&E window would be un- der pressure.
Given that there has been a sharp increase in the number of Nigerians leaving the coun- try for greener pastures as well as in search of educational and health facilities in the last few years, which has led to a surge in demand for forex, the pressure on the naira at the I&E window was heading to the level where it was in 2017 before the establishment of the I&E window.
Operational changes
It was in a bid to avert this situation that the CBN last Wednesday issued a statement in which it unveiled operational changes to the foreign exchange market. In the statement, which was signed by the Director, Financial Markets, Dr Angela Sere-Ejem- bi, the apex bank announced that it had collapsed all seg- ments of the foreign exchange market into the I&E window, adding that applications for medicals, school fees, BTA/PTA, and Small and Medium Enter- prises (SMEs) would continue to be processed through Deposit Money Banks(DMBs). The CBN also announced the re-introduction of the “willing buyer, willing seller” model at the I&E window, stating that all eligible transactions are permit- ted to access foreign exchange at the window. According to the statement, “the operational rate for all gov- ernment-related transactions shall be the weighted average rate of the preceding day’s ex- ecuted transactions at the I&E window, calculated to two deci- mal places. “Proscription of trading limits on oversold FX positions with permission to hedge short positions with OTC futures. Limits on overbought positions shall be zero. Re-introduction of order-based two-way quotes, with bid-ask spread of N1. All transactions shall be cleared by a Central Counter Party (CCP).” “Reintroduction of Order Book to ensure transparency of orders and seamless execu- tion of trades. The operational hours of trades shall be from 9am to 4pm, Nigeria time,” it added. In addition, the CBN an- nounced the cessation of its RT200 rebate scheme and Nai- ra4Dollar remittance scheme with effect from June 30, 2023. Although the apex said that it would announce further guidance on the changes in due course, it, last Friday, released a publication, titled, “understanding the operational changes to the foreign exchange market,” in order to provide clarity on some aspects of its announcement last Wednesday.
Clarity
For instance, on what collapsing all segments of the foreign exchange market into the I&E window means, the CBN said: “This means all eligible FX transactions in the market shall only be done via the I&E window, all other windows cease to exist.” It explained the functioning of the window thus: “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.” On the concept of willing buyer, willing seller model, the apex bank said: “In this model, rates are mutually agreed by both parties.” It emphasised that the despite the changes, PTA, BTA, and oth- er invisible transactions would continue to be accessed through the banks at the prevailing mar- ket rate. Similarly, the CBN stressed that there are no changes in the application process for access- ing foreign exchange under the new policy, adding that “all ap- plications shall be through the banks and all documentation re- quirements remain the same.” On the meaning of weighted average rate and how it is cal- culated into two decimal places, the Bank explained that “this is a summation of volume of FX traded multiplied by the vari- ous rates at which the deals are consummated, divided by total volume of trade.” Also, on the meaning of or- der-based two- way quotes, it said: “This is a two-way quote trading in which all transac- tions are trade backed.”
Explaining how the order book will ensure transparency of orders and seamless transac- tions, the CBN stated: “The or- der 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.” On the issue of whether the issue of the “43 non eligible items’ can access forex at the I&E window under the new ar- rangement, the apex bank said: “The status quo remains on the 43 non[1]eligible items. The items are not permitted to be funded from the I & E window.”
Conclusion
Although it may be still too early to state whether the new changes to the operations of the I&E window will yield the desired result or not, the positive reactions, they have attracted so far, especially from foreign investors, appear to indicate that they would.
