The Central Bank of Nigeria (CBN) is bringing another twist to Nigeria’s foreign exchange market by removing ±2.5% cap spread on interbank FX transactions.
The latest announcement overrides the initial practice when there was ±2.5% cap spread on FX transactions.
The apex bank noted that the removal of spread would enhance a market-based price discovery system. It also abolished restrictions on the sale of interbank proceeds.
It directed Authorized Dealers of FX to continue to conduct their foreign exchange transactions on a “Willing Buyer and Willing Seller” basis.
The statement read:
“In addition, they are to strictly adhere to high ethical standards in their dealings in the foreign exchange markets.
“This includes but not limited to adopting appropriate price disclosures and transparency for transactions.”
CBN says in a circular dated February 8, 2024
What does this mean?
The CBN is on a mission to limit the influence of operators of the parallel market in the FX market. The apex bank wants the official rate to be more competitive for investors.
The objective of removing the ±2.5% cap spread on FX transactions is to eliminate the limit on the maximum allowable difference (spread) between the buying and selling exchange rates set by financial institutions.
The advantage of this new reform is that it will allow for more flexibility in determining exchange rates.
The side effect of this is that it may lead to greater market fluctuations in the foreign exchange market.
For proper monitoring, CBN also directed the commercial banks who handle FX-related transactions to keep a record of their transactions on the relevant treasury systems and report to market authorities as stipulated.
Would there be a fluid movement of FX in the interbank market?
