Overview

In an address on June 15, 2016, Godwin I. Emefiele, Governor of the Central Bank of Nigeria (CBN), unveiled the framework for re-introducing a managed float exchange rate system, termed the Flexible Exchange Rate Inter-bank Market. This policy shift responded to a commitment from the Monetary Policy Committee (MPC) Communiqué of May 24, 2016. Emefiele provided context on three global shocks from Q3 2014: a >70% drop in crude oil prices (major FX reserve source), global growth slowdown and geopolitical tensions, and US Federal Reserve monetary policy normalization. These caused FX reserves to decline from ~$42.8 billion (Jan 2014) to ~$26.7 billion (June 10, 2016), with monthly FX earnings falling from ~$3.2 billion to below $1 billion. Meanwhile, import bills surged from N148.3 billion/month in 2005 to N917.6 billion/month in 2015. To preserve reserves, CBN had previously prioritized FX for critical needs (matured letters of credit, raw materials, petroleum products, education/medical expenses) and maintained the Naira-Dollar rate at around N197/US$1 since February 2015. Positive outcomes included exchange rate stability, reduced speculation, robust reserves covering ~5 months of imports (above the 3-month benchmark), and increased domestic production of restricted items, creating jobs. However, CBN recognized the need for a more flexible system to address persistent demand pressures and align with economic realities. The new framework aimed to allow market forces to determine the exchange rate within a managed float, increasing transparency and reducing distortions. Key features included: (1) the inter-bank market as the primary FX trading platform; (2) CBN interventions to maintain orderly market conditions; (3) removal of the official peg; (4) allowing all eligible transactions including invisible transactions; (5) permitting banks to trade FX among themselves and with customers at rates determined by market forces; (6) daily interventions by CBN as needed; (7) continued restriction of FX for certain imports to boost domestic production. The market would operate with a bid-ask spread not exceeding 1% of the prevailing rate. CBN committed to providing liquidity to smoothen volatility. This marked a significant departure from the previous fixed regime, aiming to improve FX availability, attract foreign investment, and support economic diversification.

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