- Moving from paper-based processes to electronic platforms for conducting forex transactions will discourage speculative demands and hoarding of forex in cash, thereby infusing more transparency and accountability into the forex market
If everything goes as planned, Nigeria will soon transition from its paper-based forex exchange methods to transparent electronic platforms. This shift, driven by the urgent necessity to tackle forex market challenges, seeks to discourage speculative demands and hoarding of forex in cash. Its ultimate goal is to stabilise the naira and prevent its free fall.
The Minister of Finance and Coordinating Minister of the Economy, Wale Edun, gave this hint last week, when he disclosed that the Federal Government plans to digitalise Nigeria’s foreign exchange market. This, he stressed, is a weapon to combat illegal activities and enhance transparency in the forex market. Speaking at the Nigerian Economic Summit Group (NESG) conference in Abuja, Edun said the FX market will be simplified and digitalised such that all legal and legitimate transactions will fall within the preview of the authorities. “Anything outside that will be illegal and a criminal offensive and will be robustly followed up,” he said. He further stated that President Bola Tinubu has issued an executive order, granting full legal validity for all cash within the domestic economy to enter the formal money supply system without hindrance. “There is another executive order that allows the domestic issuance of foreign currency instruments, so that they could have an incentive to provide that foreign exchange from whatever source market into income bearing instruments,” he added.
Over the years, Nigeria has faced significant challenges in managing its forex regime, leading to a situation that has been characterised by scarcity, depreciation and significant pressure on the country’s foreign reserves. Several factors have contributed to this situation. One of them is Nigeria’s dependence on oil revenue. Nigeria is highly dependent on oil revenues, with crude oil accounting for a significant portion of its export earnings and forex inflows.
Another factor considered to have put the naira in dire straits is the foreign exchange controls executed by the Central Bank of Nigeria (CBN). Nigeria has employed various forex control measures in the past to manage its reserves and stabilise the naira. These controls, such as restricting access to forex for certain import items, led to a thriving parallel market for foreign currency, with a significant disparity between the official and parallel market exchange rates. This created an avenue for rent-seeking and corruption, while also distorting the forex market. Due to falling oil prices and a decline in oil production, Nigeria’s foreign reserves have been gradually depleted over the years. External shocks, such as the economic impact of the COVID-19 pandemic, have further put severe pressures on the reserves. This depletion makes it challenging for the country to adequately meet its forex obligations and maintain stability in the forex market. Smuggling and illicit financial flows have also taken a negative toll on the naira.
Another major contributor to the sad fate of the naira is the challenge of import dependency. The country is heavily reliant on imports for several goods and services, including food items and petroleum products. This dependence places a strain on the country’s foreign reserves, as significant amounts of foreign currency are needed to finance these imports. In recent years, Nigeria has taken steps to address some of these challenges and reform its forex regime. This includes the implementation of a managed floating exchange rate system, efforts to diversify the economy away from oil, and measures to attract foreign investment. Additionally, the country has initiated policies to curtail smuggling, enhance transparency, and promote economic diversification to reduce import dependency. Despite these measures, the forex crisis persists.
Digitalising Nigeria’s forex regime is one such initiative that could address some of the existing issues. It has the potential to increase transparency, improve efficiency, and reduce the opportunities for corruption and rent-seeking in the forex market. The next day after Edun spoke at the NESG conference, the Presidential Fiscal Policy and Tax Reform Committee, led by Taiwo Oyedele, submitted its preliminary report to President Tinubu and made several recommendations. Among the recommendations was that the government should “digitalise Nigeria’s forex regime and discourage speculative demands and hoarding of forex in cash.”
The committee proposed expanding the forex market by integrating Bureau de Change (BDCs), forex apps, and retail forex dealers into the official foreign exchange market. This move aims to eliminate the black market. Additionally, digitising the forex regime was recommended to discourage currency speculation and cash hoarding. The committee suggested imposing excise taxes on foreign exchange transactions outside the official market to generate revenue. As a short-term solution, forward contracts for Premium Motor Spirit (PMS) importation were suggested, pending improvements in key economic indicators. Lastly, discontinuing the forex Verification Portal was also part of the recommendations. However, the success of these reforms will depend on effective implementation, sound economic policies, and sustained efforts to address the underlying structural issues that have contributed to Nigeria’s forex regime challenges. As a first step, the Federal Government is pressing ahead with the digitalisation of the forex regime.
What the new measure means
Digitalising Nigeria’s foreign exchange regime would involve transitioning from traditional, paper-based processes to electronic platforms for conducting forex transactions. By doing so, Nigeria intends to discourage speculative demands and hoarding of forex in cash. This move would bring more transparency, efficiency, and accountability to the forex market. Similar practices of digitalising forex regimes and discouraging hoarding and speculation can be found in various countries across the globe. For instance, countries such as India, South Africa, and Brazil have implemented digital initiatives to modernise their forex systems and reduce the dominance of cash-based transactions.
These efforts aimed to foster a more stable and controlled forex market, minimising the potential for illicit activities and promoting easier cross-border transactions. This move can bring several benefits to Nigeria’s economy and financial sector. One of them is enhanced transparency as digitalisation allows for better tracking and monitoring of forex transactions, which reduces the potential for fraudulent activities and promotes transparency. It enables authorities to have real-time access to data, promoting accountability and curbing corruption. Increased efficiency also allows for automating forex processes, thus eliminating the need for manual paperwork; it equally streamlines the overall forex operations. Digital platforms can facilitate faster, more accurate and seamless transactions, leading to improved efficiency in the forex market.
There will be minimised speculative demands because by digitalising forex transactions, Nigeria can discourage speculative demands, reducing the volatility and uncertainty in the forex market. Digital platforms can enable better monitoring of forex flows, preventing excessive speculation and market manipulation.
Digital forex transactions would discourage hoarding of forex in cash. With electronic platforms, individuals and businesses can easily and securely transact in forex digitally, reducing the reliance on physical cash and promoting a more efficient use of forex reserves. Easier cross-border transactions can be facilitated as digitisation simplifies cross-border transactions by reducing the paperwork, bureaucracy, and time required for processing. This would ease trade and investment flows, making it easier for Nigerian businesses to engage in international trade and attract foreign investment into the country.
Embracing digital forex systems allows Nigeria to align itself with global trends and standards. It facilitates integration with international financial systems and fosters better collaboration with other countries, encouraging cross-border investments and financial partnerships. By adopting digital forex regime, Nigeria can unlock these benefits and pave the way for a more efficient, transparent and inclusive forex market. In general, digitalising Nigeria’s forex regime has the potential to positively impact the country’s foreign reserves in several ways. Because digital forex transactions reduce the need for intermediaries and minimising the risk of corruption, this could potentially attract more foreign investors to the country and increase the inflow of foreign currency, thus boosting Nigeria’s foreign reserves. If digitalising the forex regime involves implementing measures to curb illicit financial flows and money laundering, this could reduce the outflow of foreign currency from the country, thus positively impacting the foreign reserves.
What happens after forex market is digitalised?
When Nigeria digitalises its forex regime, it could have a significant impact on the forex parallel (black) market. Digitalisation of forex regime would involve using digital platforms and technologies to streamline foreign exchange transactions, making them more transparent and efficient. This move can potentially reduce the demand for the parallel forex market. The parallel forex market exists due to restrictions and inefficiencies in the formal forex market, which can lead to a scarcity of foreign exchange. As a result, individuals and businesses turn to the parallel market to meet their foreign exchange needs.
By digitalising the forex regime, Nigeria can enhance the accessibility and availability of foreign exchange through formal channels. However, whether or not the digitalisation completely eliminates the parallel forex market will depend on various factors such as the effectiveness of the digital platforms, the government’s policies and regulations, and the overall stability of the economy.
While digitalisation can significantly reduce the activities in the parallel market, complete elimination may not be immediate or guaranteed. But there are other challenges that may pop up. The cyber risks associated with digitalisation the forex regime primarily revolve around potential security breaches, data privacy concerns, and vulnerabilities in the digital infrastructure. With the digitalisation of Nigeria’s forex regime, there’s an increased reliance on technology, which can introduce certain risks. Cyber criminals may target the system to gain unauthorised access, manipulate data or disrupt operations, aiming to exploit any weaknesses in the digital ecosystem.
