History of Foreign Exchange Management
Foreign Exchange Management Before 1986
Before 1986, importers and exporters of non-oil commodities were required to get appropriate licences from the Federal Ministry of Commerce before they could participate in the foreign exchange market. Generally, import procedures followed the international standard of opening of letters of credit (L/Cs) and subsequent confirmation by correspondent banks abroad. The use of Form 'M' was introduced in 1979 when the Comprehensive Import Supervision Scheme (CISS) was put in place to guard against sharp import practices. The authorization of foreign exchange disbursement was a shared responsibility between the Federal Ministry of Finance and the CBN. The Federal Ministry of Finance had responsibility for public sector applications, while the Bank allocated foreign exchange in respect of private sector applications. Increased emphasis was placed on export promotion as a means of reducing pressure on the external sector. The government introduced a number of incentives to boost non-oil exports. These included arrangements for setting up export free zones, concessions to exporters to retain 25 per cent of their export proceeds, the liberalisation of export and import licensing procedures and the provision for the establishment of an export credit guarantee and insurance scheme. Exchange control was discarded on September 26, 1986 in order to evolve an exchange rate mechanism that would better reflect the underlining macroeconomic realities.
Foreign Exchange Management from 1986 to 2002
The Second-tier Foreign Exchange Market (SFEM) came into being on September 26, 1986 when the determination of the Naira exchange rate was made to reflect market forces. The modalities for the management of the Foreign Exchange Market have changed substantially since the introduction of SFEM, in line with the principles of the Structural Adjustment Programme (SAP) which emphasise the market-oriented approach to price determination. Within the basic framework of market determination of the Naira exchange rate, various methods were applied and some adjustments carried out to fine-tune the system. A transitory dual exchange rate system (first and second-tier) was adopted in September, 1986. On 2nd July 1987, the first and second-tier markets were merged into an enlarged Foreign Exchange Market (FEM). Various pricing methods, such as marginal, weighted average and Dutch system, were adopted. With the introduction of the SFEM, the Federal Ministry of Finance had its allocative powers transferred to the CBN, but it retained approving powers on public sector transactions. The constant fine-tuning of the market culminated in the complete floating of the naira on March 5, 1992 when the system of pre-determined quotas was discontinued. The unabating pressure on the foreign exchange market resulted in the policy reversal in 1994. The reversal of policy in 1995 to that of "guided deregulation" necessitated the institution of the Autonomous Foreign Exchange Market (AFEM). Apart from the institution of an appropriate mechanism for exchange rate determination, other measures increasingly applied in managing Nigeria's foreign exchange resources included demand management and supply side policies. The CBN and the government have actively fostered the development of institutions such as the Nigerian Export Promotion Council (NEPC) and the Nigerian Export-Import Bank (NEXIM) in the drive to earn more foreign exchange. The AFEM metamorphosed into a daily, two-way quote Inter-Bank Foreign Exchange Market (IFEM) on October 25, 1999. The IFEM is expected to broaden and deepen the foreign exchange market on daily basis and discourage speculative activities.
Foreign Exchange Management from 2002 to 2015
The Retail Dutch Auction System (RDAS), Wholesale Dutch Auction System (WDAS) and Interbank Rate System Regime were used within this period. The Retail Dutch Auction System (RDAS) conducted auctions twice a week and bids were customer based, in the Wholesale Dutch Auction System (WDAS) auctions were conducted twice a week and banks bought on their own account to be sold to their customers. There was transferability of funds among banks unlike a RDAS where this is not permissible. The Bank in 2015 adopted the Interbank Rate System Regime where all items were traded on the interbank market. The Bank intervened as the need arises and it was done directly to the customers.
Foreign Exchange Management From 2016 to Date
In June 2016, the Bank adopted the managed floating exchange rate regime to enhance efficiency and facilitate a more liquid and transparent foreign exchange market, due to increased demand pressure in the foreign exchange market coupled with low accretion to reserves, arising from declining receipts from crude oil sales. The Central Bank of Nigeria is issued a guideline for the operationalization of the regime. The guideline removed tight currency control on the naira, leaving the market forces to determine the value of the currency. On the take-off of the new regime, the Central Bank of Nigeria cleared the backlog of demand of US$4.02billion. Under the new regime, the value of the naira in the Inter-bank FX market is largely driven by the forces of demand and supply. Central Bank of Nigeria on the other hand intervenes directly in the inter-bank market to boost liquidity in the foreign exchange market. The main objective of the new regime is to enhance efficiency and facilitates liquidity and transparency in the foreign exchange market, thereby attracting more foreign investments into the system. To further implement the managed floating exchange rate regime the Bank introduced: Retail Special Secondary Market Intervention Sales (SMIS) dedicated to Raw materials and Machineries, Agriculture, Airlines and Petroleum Products. Invisibles window to cater for Business and Personal Travel Allowance (BTA/PTA), sales of school fees, hostel accommodation, maintenance allowance and medical expenses abroad. Small and Medium Enterprises window for small scale importation of US$20,000.00 and below per quarter subject to completion of Form Q supported with Proforma Invoice and importer's BVN. Introduction of Investors' and Exporters' Foreign Exchange window to increase further transparency and sustain gains made by the floating of the Naira. Thus, ensuring timely execution and settlement of eligible transactions. Introduction of the Naira settled OTC FX futures in collaboration with Financial Markets Dealers Quotation OTC Plc (FMDQ), introduced the Naira-Settled OTC Foreign Exchange Futures (OTC FX Futures) in June 2016. The product was aimed at enhancing market liquidity.