How Far Can CBN FX Code Go? By Rahma Olamide Oladosu
The Central Bank of Nigeria’s (CBN) announcement of the Nigerian Foreign Exchange (FX) Code marks a significant milestone for the country’s banking sector. With the FX market being a cornerstone of Nigeria’s economy, the introduction of a code to promote ethical conduct among authorised dealers is both timely and necessary.
According to the CBN, the FX Code is designed to serve as a guideline for industry best practices, ensuring transparency, accountability, and professionalism in FX transactions. While this is a commendable step, questions linger about whether this initiative will genuinely transform Nigeria’s foreign exchange market or simply become another policy document that fails to deliver tangible change.
Nigeria’s FX market has long been plagued by challenges that undermine its potential to drive economic stability and growth. Currency volatility, a widening gap between official and parallel market rates, and allegations of unethical practices have eroded public trust and investor confidence over the years. The introduction of the FX Code signals an acknowledgment by the apex bank that the system needs reform, and one can only hope that this will be a step towards creating a more credible and efficient market. However, the success of such an initiative depends on more than just the issuance of guidelines; it requires strict enforcement, transparency, and genuine commitment from stakeholders.
One of the key benefits of the FX Code is its potential to improve the ethical landscape of Nigeria’s foreign exchange market. By setting clear standards for conduct, the Code could serve as a deterrent to some of the unethical practices that have plagued the market, such as rate manipulation, collusion among dealers, and preferential allocation of foreign currency. These practices have not only hurt Nigeria’s reputation internationally but have also contributed to domestic economic instability, exacerbating inflation and stifling business growth.
Ethical conduct in the FX market is particularly critical in a country like Nigeria, where access to foreign exchange is essential for businesses to import goods, pay for services, and settle international obligations. For years, many businesses have struggled to secure foreign exchange at official rates, leading them to rely on the parallel market where rates are significantly higher. This dual exchange rate system not only distort the economy but also creates opportunities for rent-seeking and corruption. If the FX Code can help bridge the gap between official and parallel market rates by promoting greater transparency and fairness, it could represent a much-needed step toward economic stability.
That said, it is worth questioning whether the FX Code will go far enough in addressing the systemic issues within Nigeria’s foreign exchange market. Codes of conduct, while important, are only as effective as their enforcement mechanisms. In Nigeria, where regulatory compliance often lags and penalties for unethical behavior are rarely severe enough to deter misconduct, the FX Code risks becoming another toothless policy unless the CBN commits to rigorous oversight and accountability.
The success of this initiative will also depend on the buy-in from authorised dealers and other stakeholders in the banking industry. Ethical guidelines are not self-executing; they require the active participation and commitment of those they are designed to regulate. For the FX Code to achieve its intended impact, authorised dealers must not only understand the guidelines but also internalise them as part of their operational ethos. This, in turn, raises questions about how the CBN intends to ensure compliance. Will there be regular audits? Will violators face meaningful consequences? Without clear answers to these questions, the Code could risk being undermined by those who view it as a mere formality.
Another crucial factor to consider is the broader context of Nigeria’s economic policies. While the FX Code focuses on ethical conduct, the structural challenges that have long plagued the foreign exchange market remain unresolved. Nigeria’s reliance on oil exports as the primary source of foreign exchange has left the economy vulnerable to external shocks, such as fluctuations in global oil prices. In addition, the country’s restrictive foreign exchange policies, including limits on currency repatriation and restrictions on certain imports, have created inefficiencies that no code of conduct can fully address.
For the FX Code to succeed, it must be accompanied by broader reforms aimed at liberalising the foreign exchange market and diversifying the economy. The CBN has made strides in this direction by attempting to unify exchange rates and improve foreign exchange liquidity, but these efforts need to be sustained and deepened. Without addressing the root causes of market inefficiencies, the FX Code may end up being a band-aid solution to a much larger problem.
It is also important to consider the potential for unintended consequences. While the FX Code aims to promote transparency and fairness, there is a risk that overly stringent regulations could stifle market activity or discourage innovation among authorised dealers. Striking the right balance between regulation and flexibility will be key to ensuring that the Code achieves its objectives without creating new challenges.
The formal launch of the FX Code, scheduled for January 28, 2025, will undoubtedly be a moment of celebration for the CBN and the banking industry. However, the real test will come in the months and years that follow, as stakeholders assess whether the initiative has brought about meaningful change. The CBN will need to take proactive steps to monitor compliance, enforce penalties for violations, and continuously engage with industry players to refine the Code as needed.
Ultimately, the introduction of the FX Code is a positive development that has the potential to restore confidence in Nigeria’s foreign exchange market. It signals a commitment by the CBN to address long-standing issues and create a more ethical and efficient system. However, it is important to recognise that the FX Code is not a panacea. For it to truly transform the market, it must be backed by strong enforcement, stakeholder engagement, and broader economic reforms.
The Nigerian foreign exchange market is a critical pillar of the economy, and its stability is essential for attracting investment, supporting businesses, and improving the lives of ordinary citizens. The FX Code is a step in the right direction, but it is only one piece of the puzzle. If implemented effectively and in conjunction with other reforms, it could pave the way for a more transparent and efficient market. However, if it is treated as just another policy announcement with no follow-through, it risks becoming a missed opportunity.
As Nigeria prepares to launch this initiative, all eyes will be on the CBN and the banking industry to see whether they can rise to the occasion. The stakes are high, but so are the potential rewards. By prioritising ethics, transparency, and accountability, the FX Code could help lay the foundation for a more stable and prosperous economic future for Nigeria. It is now up to the stakeholders to ensure that this vision becomes a reality.
Oladosu is a Senior Staff Writer with the Economic Confidential
