Analysis: Why BDCs and retail participants need their own “EFEMS” Nexovant

Nigeria’s foreign exchange market is once again a tale of two worlds. The official market, bolstered by the Central Bank’s Enhanced Foreign Exchange Market Sytem (EFEMS) platform, trades at N1,535/$1, while the parallel market has slipped to N1,680/$1.

The resulting 9% gap reflects growing inefficiencies in forex liquidity management. While EFEMS was designed to streamline access and foster transparency for institutional players, it has left retail participants — largely serviced by Bureau De Change (BDCs) — operating in a less regulated environment.

The EFEMS platform has largely excluded retail forex participants, leaving Bureau De Change (BDC) operators in a difficult position. While the CBN’s latest policy mandates BDCs to source forex from Authorized Dealers via EFEMS and sell to retail buyers, with periodic reporting requirements, the structure of EFEMS is ill-suited to their operational dynamics.

Unlike large institutional players, BDCs operate in smaller transaction volumes and cater directly to the retail market, which demands flexibility and consistent liquidity.

The widening disparity between these markets is more than just an economic inconvenience. It perpetuates arbitrage opportunities, where access to cheaper official dollars becomes a profitable exercise in speculation rather than a tool for productive economic activity.

A growing number of players simply bypass the official market altogether, drawn to the parallel market’s accessibility and flexibility. In this shadowy realm, rates increasingly dictate the prices of goods and services, amplifying inflation and undermining any semblance of price stability.

Liquidity in the official market suffers as a result. Retail demand, unable to find a home within the EFEMS framework, spills into informal channels. This self-reinforcing dynamic undermines the Central Bank’s efforts to stabilize the currency, while discouraging much-needed foreign investment.

Investors view the volatile spread as a warning sign, raising doubts about repatriation of profits and long-term currency stability. For foreign investors, an unreliable forex regime is a warning sign. The promise of stable repatriation becomes uncertain, and Nigeria’s already shaky ability to attract capital weakens further.

So what happens next?

This divergence demands urgent action. Not least because the retail market can not continue to be ignored nor can authorities continue to allow opacity plague the retail and informal market for FX, especially if there is risk of a potential pass through effect on inflation.

The potential solution lies in extending EFEM’s principles of transparency and price discovery to the retail end of the market. BDCs, which remain the main channel for smaller forex transactions, need a platform of their own. A formalized EFEM-style mechanism for BDC operators would likely introduce structure to a market that currently operates in a chaotic vacuum.

With regular access to liquidity and clear rules of engagement, BDCs could offer competitive rates that narrow the official-parallel gap, dissuading speculative arbitrage and restoring confidence in the naira.

The lessons of March 2024, when the spread was as low as 4%, cannot be ignored. Today, the gap has more than doubled. If policymakers fail to address retail liquidity issues, the disparity will continue to widen. Inflation will rise, foreign investors will retreat, and the parallel market’s dominance will deepen.

Nigeria cannot afford for BDCs or retail participants to remain outside the reform framework. A tailored EFEM for retail forex participants is not just desirable — it is necessary to restore balance, reduce distortions, and rebuild trust in the currency.

The longer the gap persists, the harder it becomes to fix. Furthermore if authorities are serious about capturing more data about retail market participants, The time for decisive reform is now.

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