How FX code can boost market confidence, naira stability
Last week, the Central Bank of Nigeria unveiled the Nigeria Foreign Exchange Code, a framework to improve transparency, ethical practices, and efficiency in Nigeria’s foreign exchange market. Given Nigeria’s evolving foreign exchange landscape, where liquidity issues and exchange rate volatility have often been key concerns, SAMI TUNJI explains how this can instill confidence among market participants and align Nigeria’s FX market with global best practices, with the Code expected to contribute to the naira’s stability
The Nigeria FX Code, which took effect on December 2, 2024, was designed to promote a fair, transparent, and resilient FX market that aligns with global standards. It sets out ethical expectations and compliance requirements for market participants, which include authorised dealers licensed by the CBN, banks and financial institutions operating in the FX market, interdealer brokers, and other approved institutions involved in FX transactions. The FX Code is built on key principles, including ethics, governance, execution, information sharing, risk management, and settlement processes. These principles collectively aim to enhance liquidity, reduce FX volatility, and foster investor confidence by creating a more structured and disciplined FX market.
A liquid FX market depends largely on market confidence, where transactions occur smoothly without excessive price swings. Foreign investors, exporters, and importers are more likely to participate in a market where rules are clear, risks are minimised, and regulatory oversight is strong. One of Nigeria’s long-standing FX market challenges has been investor uncertainty due to fluctuating exchange rates, unclear policies, and periodic liquidity shortages. The FX Code seeks to eliminate such uncertainties by introducing a framework where market participants act with integrity and fairness. By promoting ethical trading behaviours, the FX Code discourages fraudulent activities such as rate manipulations, insider dealings, and false pricing, thereby improving trust in the system. The requirement that transactions be executed fairly and transparently ensures that businesses and investors can confidently engage in the FX market, reducing the tendency for capital flight.
Strengthening governance is another crucial element of the FX Code that will enhance market confidence and support the naira. Banks, financial institutions, and trading desks are now required to implement clear governance structures with independent compliance functions. This principle entails establishing well-defined responsibility lines for FX trading and settlement, embedding ethical market practices into company culture, and ensuring effective oversight mechanisms. By reinforcing corporate accountability, the FX Code reduces misconduct. It enhances market stability, essential for maintaining liquidity and ensuring that the naira reflects genuine market fundamentals rather than being driven by speculation or manipulative trading strategies.
The transparency of trade execution is a fundamental aspect of the FX Code’s impact on liquidity and naira valuation. Historically, a lack of transparency in how transactions are executed has contributed to volatility in the foreign exchange market. The FX Code ensures that all transactions are handled fairly, with clear pricing policies and detailed disclosures on the factors influencing exchange rates. By enforcing standardised trade execution protocols, the FX Code eliminates opportunities for price distortions and speculative arbitrage, ensuring that exchange rates reflect true demand and supply dynamics. This level of transparency discourages the hoarding of foreign currency, which has often exacerbated naira depreciation in times of market uncertainty.
Boosting liquidity and strengthening the naira
Market manipulation has been a persistent issue in Nigeria’s FX market, undermining liquidity and weakening the value of the naira. The FX Code directly addresses this challenge by prohibiting fraudulent trading practices such as spoofing, layering, and pre-hedging abuses. The enforcement of strict compliance monitoring and penalties for violators serves as a deterrent to unethical behaviour, creating a market where prices and liquidity levels are driven by legitimate economic activities rather than artificial distortions. As a result, the FX Code fosters a healthier trading environment that supports the naira’s stability by ensuring that speculative activities do not lead to unnecessary currency depreciation.
Its key objective is to enhance FX supply by encouraging greater participation from foreign investors, exporters, and remittance senders. Foreign direct investment and portfolio inflows are critical to maintaining liquidity, and investors require a transparent and predictable FX framework before committing capital. The FX Code reassures them that Nigeria’s FX market operates with integrity, making it more attractive for investment. Exporters and remittance senders, who contribute significant foreign exchange earnings, will also have greater confidence that their transactions are being conducted at fair market rates. By fostering an environment where FX supply is more stable and predictable, the FX Code indirectly strengthens the naira by reducing the artificial scarcity that often fuels depreciation.
Liquidity in Nigeria’s FX market has often suffered from foreign exchange hoarding, lack of trust, and inconsistent policies. The FX Code seeks to create a system where liquidity flows efficiently by discouraging speculative hoarding, reinforcing risk management practices, and enhancing the interbank FX market. With stable pricing mechanisms and clear order execution rules, market participants are less likely to hoard foreign currency for speculative purposes. Enforcing risk management rules ensures that FX is used productively rather than withheld from the market. The FX Code also mandates that market makers provide liquidity efficiently rather than engage in activities that could create artificial scarcity. These measures are expected to increase the availability of foreign exchange and ensure that the naira benefits from a well-functioning market.
The result of the launch of the FX Code is becoming evident as the value of the naira strengthened at the end of January. The PUNCH earlier reported that Nigeria’s exchange rate appreciated significantly in January 2025, gaining N63.72 against the dollar to close at N1,474.78 per dollar on January 31 at the Nigerian Foreign Exchange Market. According to data from the FMDQ Securities Exchange Limited and the CBN, this increase of 4.14 per cent pushes the local currency to the highest level it has reached in seven months, with the last time the currency traded at a similar rate being June 11, 2024, when it stood at N1,473.88/$ in the official market.
CBN talks tough
Speaking during the launch of the FX Code at the CBN headquarters in Abuja, the CBN Governor, Olayemi Cardoso, issued a stern warning to financial institutions, emphasising that violations of the newly launched Nigeria FX Code will attract severe sanctions. Cardoso highlighted the significance of the framework in restoring trust and transparency in the country’s foreign exchange market.
“Let me reiterate: the era of opaque practices is over,” Cardoso declared. “We will not hesitate to act against any institution or individual that undermines the integrity of our financial markets,” he said.
The governor further affirmed the enforceability of the FX Code, supported by the CBN Act of 2007 and the Banks and Other Financial Institutions Act of 2020.
These legal instruments provide the framework for imposing penalties and administrative actions on violators.
Cardoso called on board chairs, managing directors, and chief compliance officers to ensure full adherence to the code’s principles, stressing that embedding these standards within their organisations is non-negotiable.
Despite the potential benefits of the FX Code, successful implementation will require strong enforcement by the CBN. Market participants must cooperate by embedding compliance frameworks within their operations and prioritising ethical conduct over short-term gains. Public awareness and education are crucial to ensuring traders, businesses, and investors understand the FX Code and its benefits. The CBN should conduct periodic training sessions to educate market participants on best practices and continuously refine the FX Code to adapt to evolving market conditions.
What experts say
Speaking with The PUNCH, Bunmi Bailey, Head of Research at SBM Intelligence and an honorary member of the Nigerian Economic Society, said that the FX Code is already yielding positive results in the market. She noted that there has been an increase in market confidence, as evidenced by a significant rise in FX liquidity inflows.
Citing a report from FMDQ, Bailey observed that liquidity inflows had more than tripled in the past week alone, which she attributes to the introduction of the FX Code by the CBN. She emphasised that the FX market had previously operated without clear rules, contributing to a lack of transparency and inefficiencies. The FX Code now provides a structured regulatory framework that promotes market discipline and ensures transactions are conducted with integrity.
Bailey highlighted that the improved transparency brought about by the FX Code is helping to close loopholes in the market and create a more predictable trading environment. This, in turn, contributes to the stabilisation of the naira.
However, she cautioned that while the initial results appear promising, the sustainability of these improvements remains a key concern. She suggested that if liquidity inflows continue to rise significantly over the coming weeks and months, it would be strong evidence that the FX Code is effective. For her, the true measure of success will be whether the FX Code can sustain these gains over the next two to six months, ensuring continued appreciation of the naira and consistent market confidence.
Economist, Aliyu Ilias, also weighed in, emphasising that confidence and integrity are essential to boosting liquidity in the market. He pointed out that while stability is the first crucial element in managing foreign exchange, addressing the supply side of FX is equally important. He acknowledged that the CBN has recently introduced numerous policy frameworks, but consistency and implementation remain key.
He noted that introduction of the FX Code is a welcome development in stabilising the market, but urged the CBN to ensure that it follows through with concrete actions rather than relying on multiple policy frameworks that lack proper execution.
Ilias further noted that for the FX Code to be truly effective, the CBN must adopt a more pragmatic approach rather than adhering strictly to an official stance on foreign exchange management. He cautioned against relying solely on traditional regulatory methods and advocated a broader strategy incorporating market-driven solutions. He also highlighted that while the FX Code can improve transparency, it must be supported by consistent and well-executed policies to sustain its impact over the long term. Ensuring that these policies are aligned with actual market needs will be critical in securing continued confidence from investors and businesses alike.
The Nigeria Employers’ Consultative Association earlier applauded the CBN for introducing the Nigerian Foreign Exchange Code, describing it as a major step towards enhancing transparency, ethical conduct, and governance in the country’s foreign exchange market.
In a statement, NECA’s Director-General, Mr. Adewale-Smatt Oyerinde, lauded the policy as a strategic initiative that could boost investor confidence and improve economic stability if properly implemented.
“The introduction of the FX Code is a commendable step towards enhancing transparency, integrity, and professionalism in Nigeria’s foreign exchange market. This aligns with NECA’s advocacy for policies that foster a conducive business environment and economic stability,” Oyerinde stated.
He emphasised that while the FX Code is a welcome development, its success will depend largely on effective enforcement and compliance by all market participants.
The Nigeria FX Code marks a significant milestone in the CBN’s efforts to reform the FX market. By reinforcing ethical conduct, transparency, governance, and risk management, the Code can restore market confidence, improve liquidity, and stabilise the value of the naira. However, strict enforcement, compliance from market participants, and continuous refinements will be necessary for it to yield meaningful results. If properly implemented, the FX Code could transform Nigeria’s foreign exchange landscape into one that attracts investors, supports businesses, and ultimately strengthens the economy while ensuring the long-term stability of the naira.
