Understanding Nigeria’s Fx challenges & CBN’s policies

The drop in crude oil prices in the first quarter of 2020, exacerbated by the impact of the COVID-19 pandemic on other sources of foreign exchange earnings, has led to volatility in Nigeria's FX markets. The Central Bank of Nigeria (CBN) has been adopting strategies and implementing policies to address the crisis. Ekemisit Effiong, Head of Research at SBM Intelligence, provided insights on the current situation. The CBN's focus on exchange rate stability is evident in recent moves, such as the ban on FX to Bureau De Change (BDCs). The CBN argues that the rates at the NAFEX and I&E windows are reflective of the Naira's true value, dismissing other rates. However, Effiong highlighted that despite these efforts, the Naira has not shown significant improvement compared to a year ago. He expressed skepticism about the effectiveness of the CBN's measures, stating that liquidity constraints continue to hamper positive movements in the exchange rate. The presence of multiple exchange rate windows has raised concerns about price distortions and arbitrage opportunities. Effiong emphasized the need for clarity on the end goal of the CBN's actions, as market participants are perplexed by the evolving dynamics. The CBN's assurance of adequate FX supply for legitimate demands contrasts with the experiences of many who face restrictions and uncertainties in accessing foreign exchange. Effiong criticized the selective approach of the CBN in allocating FX, stating it deviates from free market principles and creates regulatory uncertainty. He pointed out that the lack of clarity on future FX accessibility exacerbates market concerns and hampers investment decisions. The conflicting signals from the CBN have fueled uncertainty and skepticism within the market, hindering trust and confidence in the regulatory framework. Effiong underscored the importance of transparency and consistency in the CBN's FX management to build trust and facilitate market operations. Overall, Effiong emphasized the need for a clear and coherent FX policy framework to address Nigeria's FX challenges and restore market confidence.