CBN’s Insights on the Challenges of Overseeing the Foreign Exchange Market: What to Note

The devaluation of the naira against the dollar and the Central Bank of Nigeria’s struggle to control the foreign exchange market are linked by the CBN to the redirection of diaspora remittances toward unofficial platforms such as the parallel market.

Yesterday, Nairametrics reported that the Naira experienced a historic decline, reaching an unprecedented level of N930/$1 in the parallel market. Simultaneously, the Investor and Exporter (I&E) window saw trading at N782.38/$1 on Wednesday, August 9, 2023. These developments reflect an escalation in demand pressure and exacerbate forex scarcity.

Folashodun Shonubi, the acting Governor of CBN, revealed this information during his presentation of a Distinguished Personality lecture titled “Diaspora Remittances and Nigeria’s Economic Development.” He addressed members of the Executive Intelligence Management Course (EIMC) 16 at the National Institute for Security Studies in Abuja.

Shonubi clarified that a significant portion of diaspora remittances arrives in Nigeria in the form of dollars and is not officially documented, leading to its circulation within the parallel market.

Remittances from the diaspora remain outside the official framework.

Shonubi highlighted that although dollars from remittances enter the country, they often remain unaccounted for within the official system, implying potential diversion. He underscored the challenges posed by unregulated black or parallel markets, which can facilitate criminal activities. 

Shonubi noted that individuals, including bankers, resort to these markets to exchange money quickly and inconspicuously after committing offenses. 

He emphasized the significance of comprehending the intricacies of these dynamics rather than relying solely on conventional wisdom, as some of the funds within the black market originate from diaspora remittances. Shonubi stressed the need to avoid sentimentality and gain a deeper understanding of the situation for effective regulation and management.

He emphasized the importance of implementing measures in Nigeria to curb illicit remittances and to detect these channels, thereby ensuring that remittances follow legitimate routes and maximizing their potential benefits for driving economic growth.

Challenges in effectively handling the forex crisis.

The head of CBN explained that a substantial portion of incoming funds entering through various unauthorized avenues and subsequently converging in the parallel market has played a significant role in exacerbating Nigeria’s foreign exchange (FX) crisis.

He mentioned that utilizing the banking system more would be beneficial for sending money within Sub-Saharan Africa. Collaboratively identifying these channels is essential to ensure funds flow through proper avenues, ultimately maximizing economic growth benefits. 

Also, the existence of black markets poses challenges, impacting foreign exchange market management and policy effectiveness. Insignificant diaspora remittances to Nigeria contribute to difficulties in exchange rate control while operating within black markets isn’t feasible, and a lack of information hampers pricing understanding. 

He illustrated an example related to the I&E window’s operation. Delays and small transactions can manipulate closing rates. Highlighting the significance of diaspora remittances, he emphasized that they serve as a vital income source for numerous countries.