CBN removes exchange rate cap, allows market-based limits

The Central Bank of Nigeria (CBN) has issued a directive to remove the initial cap on exchange rates set by International Money Transfer Operators (IMTOs). The move comes in response to alleged excessive speculation and hoarding of foreign currency within Nigerian banks.

As per a circular sent to authorized dealers, IMTOs, and the public, the CBN has now allowed relevant parties to base naira payouts’ exchange rates on the current market rate in the Foreign Exchange Market.

This new regulation allows transactions to occur according to the “willing buyer, willing seller” principle, indicating that the exchange rates will be determined by the market’s supply-demand forces instead of a preset limit.

Previously, a CBN circular dated September 13, 2023, mandated that IMTOs should establish naira payouts’ exchange rates within a specific limit, calculated as -2.5% to +2.5% around the Nigerian Foreign Exchange Market’s closing rate from the previous day.

This earlier policy aimed to stabilize depreciating exchange rates and maintain market consistency. However, the implementation of the new circular signifies a shift in this policy.

Following the Central Bank of Nigeria’s (CBN) new circular termed “Removal of Allowable Limit of Exchange Rate Quoted by International Money Transfer Operators”, the previous directive dated September 13 has been superseded. The new development aims to liberalise the Nigerian Foreign Exchange Market for increased flexibility.

This new policy is anticipated to enhance transparency in the Nigerian Foreign Exchange Market and promote market-based exchange rates. As a result, individuals making international money transfers may experience heightened pricing competition.

Furthermore, the CBN’s policy shift is speculated to encourage IMTOs to repatriate their foreign exchange (forex) holdings rather than storing them overseas, thereby increasing the influx of forex into Nigeria.

While this new market-driven policy promises to support the country’s financial sector’s health, it heralds potential implications for Nigeria’s foreign exchange market, including its individual and business participants. The exact impact of this new policy will only fully reveal itself with time.

In addition, the CBN has directed all financial institutions to cease charging processing fees on large cash deposits.