Financial market experts have identified at least seven measures that Nigeria can undertake to enhance dollar liquidity in its foreign exchange market following the recent decision to float the naira. The Central Bank of Nigeria (CBN) made a significant departure on June 14 by allowing banks to trade FX at market rates instead of controlling the rate. This move has been applauded as the crucial initial step in addressing the country's troubled FX market.

On the day of the float, the naira plummeted by a record-breaking 36 percent against the dollar, and it has since been trading closer to the parallel market rate. As of Friday, June 23, it closed at N767 per US dollar. Now that market forces are determining the naira exchange rate, analysts suggest that the CBN should focus on improving dollar supply and liquidity in the market.

Firstly, experts recommend that the CBN consistently supplies dollars to the market, even if in small quantities. The apex bank should ensure that the sale is spread evenly among all banks, maintaining the same amount and market rate. Spot and forward trades can be utilized for these transactions. Last Thursday, the CBN sold $29.5 million to nine banks at rates between N765 and N775 per US dollar.

Secondly, to attract more dollar inflows, banks should be allowed to trade FX without any restrictions. Since the float, banks have been conducting dollar trades based on a willing buyer/willing seller basis without CBN's price control intervention. Sustaining this practice will restore confidence among investors who hope it will not be another false start.

Furthermore, the CBN needs to engage in effective and transparent communication to instill confidence in the market. This is a critical time when participants still seek clarity regarding the new policy. Consistent communication will alleviate uncertainties and encourage market players.

Clearing the CBN's unsettled trades is also essential in restoring dollar inflows. The International Monetary Fund estimates that Nigeria has a backlog of approximately $2 billion in dollar demands. Settling this backlog will significantly contribute to convincing foreign investors to return to the market.

Moreover, the restoration of naira-settled Over The Counter (OTC) FX Futures is crucial. These non-deliverable forward contracts allow parties to agree on an exchange rate for a future date without the obligation to deliver the underlying US dollar. By reintroducing OTC FX Futures, capital flows to the fixed income and equity markets can increase, and foreign portfolio investors will have a tool for capital protection.

Additionally, experts suggest that the CBN should consider selling its Open Market Operation (OMO) bills to foreign investors at rates between 18-20 percent, closer to the inflation rate. This move would entice foreign capital back into the country. Some foreign fund managers have already indicated that higher interest rates on government debt could incentivize their return. However, this strategy may pose challenges for the government, as it could increase borrowing costs for a nation that allocated 96 percent of its revenues to debt servicing last year, according to World Bank data.

Lastly, encouraging oil companies and oil servicing companies to sell their dollars at the Importers' and Exporters' (I&E) window at prevailing market rates would help improve liquidity. Removing the cap between the buying and selling rates is another vital step in this direction.

Implementing these measures will contribute to Nigeria's efforts to enhance dollar liquidity and stability in the foreign exchange market.