On September 28, 1986, the Federal Military Government formally launched the Second-Tier Foreign Exchange Market (SFEM) as a key component of the Structural Adjustment Programme (SAP), thereby floating the Naira and ending 26 years of fixed exchange rate regime.
The announcement was made in Lagos by Head of State, General Ibrahim Badamasi Babangida, after the promulgation of the SFEM Decree.
Under the new arrangement, Nigeria will operate a dual exchange rate system. The First-Tier rate, administratively determined by the Central Bank of Nigeria (CBN), will apply to official obligations such as debt servicing and contributions to international organisations, while the Second-Tier rate will be determined by market forces of demand and supply through licensed banks.
The introduction of SFEM amounts to a massive devaluation of the Naira, which until now exchanged at about 90 kobo to the US Dollar.
At the maiden auction last Friday, the Naira depreciated sharply from about N4 to over N5 to the Dollar, with dealers projecting convergence at over N20 to the Dollar.
Authoritative sources said the move is part of IMF-inspired reforms the Babangida administration was compelled to adopt following the collapse of crude oil prices, dwindling foreign exchange earnings and depleted external reserves.
The CBN disclosed that licensed commercial and merchant banks will now allocate foreign exchange through weekly competitive bidding, with Dutch and other auction models to be tested. Government will also license Bureau de Change operators to broaden access and liberalise the market.
A Presidency source said SFEM is expected to evolve an effective mechanism for foreign exchange determination and allocation to guarantee short-term stability and ensure realistic long-term pricing of the Naira.
