Second-Tier Foreign Exchange Market sometimes known by the acronym SFEM was a second official

foreign exchange market The foreign exchange market (forex, FX, or currency market) is a global decentralized or over-the-counter (OTC) market for the trading of currencies. This market determines foreign exchange rates for every currency. By trading volume, ...

in Nigeria that opened in September 1986 and was effective until middle of 1987. The market window was open to both Nigerians and foreigners and the initial plan was to find a market rate for the

naira The naira (sign: ₦; code: NGN; , , , ) is the currency of Nigeria. One naira is divided into 100 ''kobo''. The Central Bank of Nigeria (CBN) is the sole issuer of legal tender money throughout the Federal Republic of Nigeria. It controls the ...

. A first tier market was operated by the government for debt servicing and servicing public sector letters of credit The SFEM was the first time a Nigerian government floated a dual exchange rate system.

Flexible rate system

Prior to SFEM, the government through the

Central Bank A central bank, reserve bank, national bank, or monetary authority is an institution that manages the monetary policy of a country or monetary union. In contrast to a commercial bank, a central bank possesses a monopoly on increasing the mo ...

fixed the exchange rate which was 99 cents to a naira in May 1986.Down with the naira, The Economist (London, England), A Survey of Nigeria. Saturday, May 3, 1986, Vol. 299, Issue 7444, p.8 This mechanism was backed by import restriction, a pegged currency and foreign exchange control. However, when new stiffer import restrictions and

foreign exchange controls Foreign exchange controls are various forms of controls imposed by a government on the purchase/sale of foreign currencies by residents, on the purchase/sale of local currency by nonresidents, or the transfers of any currency across national b ...

were implemented in 1982 it created a divergence between the government official rates and the rates obtained in the parallel market sometimes called the

black market A black market is a Secrecy, clandestine Market (economics), market or series of transactions that has some aspect of illegality, or is not compliant with an institutional set of rules. If the rule defines the set of goods and services who ...

. In 1986 this rate was up to 4 naira to $1 naira. The introduction of SFEM was to dampen interest in the black market, deregulate the financial sector and allow market forces to determine the exchange rate. SFEM began in September 26, 1986 with the value of the naira determined by weekly auction and the highest bids receive not more than 10% of the allocation. From its beginning, the system led to a devaluation of the naira with rates determined by the average of successful bids, marginal pricing and finally through dutch auction. In April 1987 the exchange rates became determined by a dutch auction system until the second exchange rate was merged with the official exchange rate in July 1987 to form the Foreign Exchange Market which operated under the auction system of SFEM.

References

{{reflist Economy of Nigeria