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Background

I write in response to numerous enquiries from my friends on the implications of the new Central Bank of Nigeria's (CBN) flexible foreign exchange (forex) policy. I have deliberately omitted banking and finance jargon to aid easy understanding.


First category of importers

Importers that open letters of credit or bills for collection shall continue to get forex from their banks to open their letter of credit, or pay their suppliers who shipped goods on credit under bills for collection.

The difference is that, the rate of US dollar (USD) at any time is very transparent and could be checked on the internet by all parties. Also, the exchange rate keeps changing, in that the rates in the morning may be lower or higher than rates in the afternoon. Therefore, the dollar/naira exchange rate shall be determined by forces of demand and supply. The rate will rise if more people demand for forex at any given time and vice versa.

The term "flexible forex rates" means that the CBN will no longer peg the exchange rates of Naira, and has also removed many restrictions to the access and sale of foreign currencies in Nigeria, starting from Monday 20th June, 2016.

CBN will be watchful of the rates, and shall always intervene by selling a huge amount of USD to the market including your banks, to ensure that the rates do not rise so high to the extent of triggering dangerous inflation. Note that one of the functions of the CBN is to maintain price stability, and to manage inflation in the economy.

Your bank shall still charge you forex spread, and commission on letters of credit or bills for collections opened. Bank customers who pay medical bills and school fees, need travel allowance, remit dividends, and make invisible trade payments, shall upon proper documentation, apply to their banks who will sell the forex needed at the rate applicable, at the time of request.


Second Category of Importers

Many importers would never buy dollars through inter-bank market as proper documentation would reveal the actual prices of their items of import, resulting in payment of appropriate duty; they pay less duty to maximize profit. Importers would rather under-invoice and pay the difference to their suppliers through black market platform.

There are some foreigners doing business in Nigeria who hide their true earnings to avoid payment of appropriate taxes, and avoid buying forex from official markets. They will pay any rate to transfer their illicit funds abroad.

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