KEY POINTS
- The Central Bank of Nigeria (CBN) will fully automate foreign exchange (FX) trades by December 2024, enhancing efficiency and transparency in the market.
- The automation comes as Nigeria struggles with significant currency devaluation, inflation, and a shortage of foreign exchange, all of which have hindered economic progress.
- This initiative is part of broader reforms aimed at increasing liquidity, ensuring transparency in currency trading, and addressing the challenges of Nigeria’s FX market.
The recent revelation by Nigeria Central Bank (CBN) to have commenced the process of automating foreign exchange (FX) trades by December 2024 is a historic development in the country’s financial system. In their report, Reuters affirmed that having seen this economy go through some highs and lows, this news brings out the feeling of both hope and concern within residents and citizens of the nation.
The need for FX automation in Nigeria
Nigeria’s foreign exchange market has been liberalized for decades and has been featured by;
- High level of illiquidity
- Opaque nature and
- Dual/multiple exchange rates.
Since it is an oil-producing country, Nigeria relies much on its FX reserves for its importation. There is no efficient mechanism for FX trading and this has led to inefficiencies that lock in those with information advantage over the market and is detrimental to the overall economy.
At the moment, automating the FX trading is seen to be a perfect move by the Central Bank especially when there is a lot of effort being put into trying to stabilize the Naira and control inflation. Automated trading is being introduced by the CBN to make the system more efficient and transparent and therefore increase investors’ confidence.
Increased transparency and efficiency
Perhaps the most eagerly awaited change is that automation makes FX trades more transparent. In the current system, it is very hard to determine the real position of demand and supply in the foreign exchange market.
One of the benefits of the automated trading platform is that the data is real-time, and the public, businesses, and international investors will be able to see the market situation better.
This is particularly important because transparency can rebuild the trust that has been eroded over time by practices such as the provision of preferential access to foreign exchange for special groups. If properly implemented, then automation could be very fair to all the participants hence eliminating the perennial problems of bias and favoritism in the distribution of foreign currency.
Also, the efficiency of the automated FX market will guarantee faster execution of operations and eliminate the delays that have always been an inconvenience to everyone, including individuals and businesses.
Impact on currency volatility
This has led to poor policies in Nigeria and the Naira, the country’s currency, has been devalued several times over the years due to over-reliance on oil as its major export. The following is one of the most important questions that people are asking about the automation of FX trades: Will this lead to the stabilization of the Naira? Automation alone may not cure the root causes of currency volatility but it would offer a better picture of the Naira in relation to the supply and demand.
If the official exchange rate gradually starts to better represent the real market rates, the business and the common populace may gradually shift towards the use of the official exchange rate hence strengthening the Naira.
However, it is evident that Nigeria’s economy still has a long way to go in terms of diversification and stability – the country’s economy is still very much a ‘black swan’ economy, where events like a drop in the price of oil could easily disrupt the FX rate. Though the automation of trade is still useful, it should be done within the context of overall economic diversification, better fiscal policies, and non-oil exports.
Challenges ahead
However, the CBN’s action is laudable some concerns should be taken when implementing such a major reform. It is anticipated that the following aspects will determine the success of FX automation: The stability of the technology; the level of awareness among the users; and the continued autonomy of the Central Bank in implementing clear policies.
The change to the new automated system will therefore likely be met with some resentment, especially from some of the personnel who benefit from the current paper-based system.
The transition to this new framework will need the cooperation of the government and financial institutions in particular. Also, figuring out how to accommodate the less computer-literate small companies and private persons to the benefits of the automated system might be an issue.
Looking forward: a transformative change?
All the same, the decision to automate FX trades in Nigeria is a good step, towards the right direction of having a more transparent, efficient, and fair foreign exchange market. The possible advantages include the growth of investors’ confidence, the decrease in corruption opportunities, and a stable currency.
Nonetheless, the reform implementation process should be facilitated by the Central Bank and the government to make necessary changes to guarantee the reform’s positive impact on all the country’s citizens, irrespective of their socioeconomic status. If well managed, this could be the start of a stronger and more sustainable economic future for the country and a glimmer of light for a nation ready for change.
