As a business providing foreign exchange services and cross-border payment solutions for other businesses, one of the most common questions we receive is: Why does the foreign exchange market operate multiple exchange rate windows? This blog post aims to clarify this concept and shed light on the reasons behind it.

Understanding the Different Exchange Rate Windows

Before diving into the “why,” let’s explore the main exchange rate windows in Nigeria’s foreign exchange market.

The Official Market

This window is managed by the Central Bank of Nigeria (CBN), the custodian of the nation’s external reserves. The CBN sets an official exchange rate for foreign currencies and employs a managed float system, where market forces influence rates, but the CBN intervenes to reduce extreme fluctuations.

This approach ensures stability and protects the value of the Naira.

Who Can Access It?
The official rate is available to commercial banks, licensed Bureau de Change (BDC) operators, and other authorized players regulated by the CBN.

The Parallel Market

The parallel market operates independently, guided solely by supply and demand. Often referred to as the “willing buyer, willing seller” market, it reflects the true value of the Naira more accurately than the official market, albeit with higher volatility due to speculation.

Who Can Access It?
The parallel market is open to everyone. Bureau de Change (BDC) operators play a key role in this space, sourcing foreign currencies primarily from banks and acting as authorized retailers despite misconceptions about their legality.

The I&E Window

Introduced in April 2017, the Investors & Exporters (I&E) window facilitates foreign exchange trading at market-determined rates for investors, exporters, and wholesale users. It was designed to boost liquidity, ensure quick transaction settlements, and support economic recovery following the 2016 recession.

Who Can Access It?
This window is accessible to exporters, authorized dealers, portfolio investors, and other wholesale participants seeking to exchange foreign currency for Naira at market-determined rates.

Why Multiple Foreign Exchange Rate Windows?

A multiple exchange rate system is a strategic measure to address economic challenges. It:

• Eases pressure on foreign reserves during economic shocks.
• Controls inflation and manages importers’ demand for foreign currency.
• Enables governments to regulate foreign currency transactions swiftly.

Such systems provide a buffer, giving governments time to resolve balance of payments issues. This is especially critical for fixed-currency regimes, which might otherwise face full currency devaluation and dependence on foreign assistance.