Since the last post I made about the EFEMS I've gone on to read some more about the newly introduced Exchange Matching System (EFEMS) which is one of the major reasons the naira is gaining strength.

Here is an excerpt from this article I found from businessdayng, it says the EFEMS has mainly brought transparency:

“This transparency has shown that the banks had more liquidity (dollar supply) before the launch of the platforms,” the source said.

On Monday the CBN kick-started the EFEMS, an electronic platform introduced to tackle speculation and improve transparency in Nigeria’s FX market. It automatically matches buy and sell orders, promoting fairness and efficiency in FX trading. Financial experts have expressed optimism about EFEMS’ potential to address persistent challenges affecting the naira and Nigeria’s FX reserves.

The EFEMS system allows authorised dealers, including commercial banks, to place buy and sell orders in real-time. Transactions are automatically matched based on predetermined rules, ensuring swift execution and real-time visibility for market participants and regulators.

The main reason the EFEMS is so game-changing is that it lets everyone see how much foreign currencies are available to supply the demand for foreign currencies, and this has exposed the fact that supply is huge.

And if you know anything about economics, you know what happens when supply exceeds demand, price drops.

And this is one of the major reasons foreign currencies are losing ground to the naira, the supply of foreign currencies is way more than the naira demand for foreign currencies.

Since the launch of the EFEMS on Monday the USD has gone from 1660/$ to around 1593 today, and more gains are in sight.

Why this Wouldn't Last

The EFEMS lets us see the supply of foreign currencies available, the ones available for sale in banks and other entities. Now that the EFEMS exists we have seen that the supply available is bigger than demand, resulting in the price drop.

The banks and many firms involved in the business do not want this. They're surely not happy that their huge stacks of foreign currencies are now worth less simply because the EFEMS can see their stacks.

So it's very simple, isn't it? These guys would simply make their stacks look smaller so that the available supply would seem less. And you know the lesser the supply the more the price.

This simple move of reducing their stacks would improve the price of their foreign exchange stacks and they'll no longer run a loss.

Now, how they would reduce their stacks is not certain, but it's easily doable. They'll most likely do this by hook or crook, that's what business and capitalism are about, these guys can easily manipulate this stuff to adjust to the existence of the EFEMS just to make a profit.

They can also manipulate this stuff to give the naira some gains, but that would be later if it ever happens. For now the most important thing to them, almost certainly, is the devaluation of their foreign exchange stacks and they would want to set that right before anything else.

Except if according to their calculations, naira gains would favour them, but that's highly doubtful. If naira gains would favour them they wouldn't have hidden their stacks all this while. The hiding of their stacks was what made it look like supply was way less and that was one of the most important factors driving the price of foreign currencies up and the price of the naira down.

So, let's see how it goes. This might just be something they manipulate at will in the future. Businessmen always put profit above all else.

The End

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