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Nume Ekeghe writes on the intricacies of the CBN’s policies, assessing their transparency, efficacy and impact on the Naira’s resilience in the face of complex economic realities.

The Central Bank of Nigeria (CBN) has over the past weeks issued several policies aimed at not just boosting liquidity at the foreign exchange market but also to curb excessive demand for dollars, as analysts believe that the transparency and effectiveness of these policies will be able to stabilize the naira.

 These measures aimed at tackling forex liquidity challenges, curb excessive speculation, and enhance transparency, include the removal of allowable limit of exchange rate quoted by the International Money Transfer Operators (IMTO), liberating the IMTOs to quote exchange rates based on prevailing market rates at the Nigerian Foreign Exchange Market.

It had also issued another circular titled “Harmonisation of Reporting Requirements on Foreign Currency Exposures of Banks,” following concern over the growing foreign currency exposures of banks, highlighting the risks associated with holding excess long foreign currency positions. 

Likewise, it issued a warning against providing inaccurate information in forex transactions and most recently barred international oil companies (IOCs) from repatriating 100 percent of their foreign exchange proceeds at once.  According to the circular, only 50 per cent of forex proceeds can be repatriated at once as it noted that the practice which is known as “cash polling” has an impact on liquidity in the domestic forex market.  The apex bank also stopped the issuance of personal and business travel allowance in cash.

According to Comercio Partners in its Macroeconomic Outlook 2024 titled, “Finding Rain in Drought,” whilst the naira may encounter ongoing volatility against major currencies, influenced by the pace of liberalization and the efficacy of measures addressing FX shortages, “Investor confidence and foreign capital inflows hinge on the transparency and effectiveness of these policies. 

“A strategic and transparent management of FX reserves is imperative to instil confidence in the stability of the Naira and mitigate potential market uncertainties. Considering the multifaceted factors at play, a nuanced expectation for the naira in 2024 emerges.

“The impact of the new CBN governor’s policies and the challenge of rising inflation introduce elements of uncertainty. The prevailing challenges, rooted in persistent FX shortages and an expanding exchange rate gap, demand nuanced policy adjustments. The efficacy of the CBN’s policies on FX liberalization, coupled with its strategies to manage the reserves, emerges as a critical determinant of the Naira’s trajectory.

“The Naira’s journey in 2024 is marked by a delicate balance between transformative opportunities and persistent challenges. The interplay of new CBN policies, acceleration of growth and the response to rising inflation will collectively shape the Naira’s resilience and stability in the coming year. Vigilance, adaptability, and strategic policy adjustments will be key elements in navigating the complex economic landscape.”

The report noted that the swift nomination and approval of Cardoso reflected a commitment to chart a new course for the nation’s economic landscape. “Cardoso wasted no time initiating reforms to address entrenched economic challenges. A pivotal move was the unification of FX rates, eliminating disparities between the parallel and official markets, thereby creating a unified market. This strategic step aimed to bring about much-needed consistency and transparency in the foreign exchange system, fostering an environment conducive to economic stability.

Navigating the Backlog Storm

Experts posited that the considerable depreciation of the Nigerian naira is rooted in global economic shocks, including the aftermath of the COVID-19 pandemic and geopolitical tensions from the Russia-Ukraine war. These external forces, they observed, triggered adverse consequences such as heightened inflation, increased interest rates, and escalated import costs. Domestically, they are of the view that stringent foreign exchange policies and limited dollar inflows exacerbated the erosion of the naira’s value.

The prevailing dollar backlog, coupled with external challenges amidst global economic uncertainties, casts a shadow of uncertainty over Nigeria’s economic horizon. As the backlog intensifies, there looms a growing risk of heightened pressure on the exchange rate. This ominous scenario is compounded by factors such as dwindling external reserves and capricious fluctuations in crude oil prices.

The experts also noted that the spectre of exchange rate strain introduces an element of volatility and uncertainty into the local bonds market. Local investors, cognizant of the potential impact of currency devaluation on their investments’ real returns, approach the market cautiously. Foreign investors, too, may choose to remain on the sidelines, navigating the turbulent waters with prudence.

As Nigeria charts its course through these economic headwinds, the path forward remains uncertain. The nation stands at a pivotal juncture, where the interplay of inflationary pressures, tightening measures, liquidity dynamics, and currency challenges will shape its economic destiny in the coming months. Investors, both domestic and foreign, watch intently, braced for the next chapter in Nigeria’s economic odyssey.

Exchange Rate Liberalisation

A longstanding concern contributing to naira instability was the FX backlog. Cardoso took decisive action to clear this backlog, aiming to instil confidence in the market and stabilize the national currency. Beyond immediate challenges, he implemented a comprehensive set of reforms, introducing Regular Open Market Operations, adjusting treasury bills issuance, deposit structures, and the Cash Reserve Ratio. These measures collectively fortified the financial system, enhanced liquidity management, and aimed at fostering economic stability.

The persistent FX shortages, acting as a constraint on economic activity, have created a formidable challenge for exchange rate liberalization. Despite the commendable efforts by the Central Bank of Nigeria (CBN) to address these shortages, the widening gap between official and parallel exchange rates signals a complex landscape.

The recent policy shift, lifting the ban on 43 items and plans to clear unmet FX forwards, underscores a commitment to navigate these challenges. However, the resurfacing gap and the dwindling average daily FX turnover at the official window to USD95 million in September indicate the intricate nature of achieving a fully liberalized exchange rate.

The revelation of the CBN’s consolidated financial statements for 2022 has brought to light a nuanced understanding of the nation’s FX reserves dynamics. The decline from $37.1 billion at the end of 2022 to $33.2 billion in September emphasizes the intricacies at play. The opacity surrounding nearly $32 billion categorized as “FX forwards, OTC futures, and currency swaps” raises concerns about the transparency of the reserves.

While acknowledging the likely inclusion of non-deliverable contracts and longer-tenor commitments, the lack of a detailed breakdown inhibits a thorough assessment. Short-term liabilities, such as foreign-currency securities lending and FC forward payables, contribute to the layered complexities.

Reforms Take Center Stage

Governor Olayemi Cardoso’s strategies, implemented over the past two months, aim at reducing excess liquidity, managing inflation, and fostering a stable economic environment. These include regular Open Market Operations (OMO), removal of the cap on the remunerable Standing Deposit Facility (SDF), sustained Cash Reserve Ratio. These measures collectively fortified the financial system, enhanced liquidity management, and aimed at fostering economic stability.

These measures have already shown positive results, with reduced excess liquidity in the banking system, an increase in the Overnight Bank Borrowing (OBB) rate, and a decline in month-on-month inflation. The commitment to continuous assessment and adaptation underscores the Central Bank’s dedication to navigating the intricate economic landscape and fostering sustainable growth.

Liquidity Conundrum

Contrary to CBN’s efforts to curtail money supply, the system liquidity remains robust. Notably, the investor appetite for government bonds has seen a substantial uptick. In the Nigerian Treasury Bills (NTB) space, total sales have grown by 3.5% Year-on-Year (y/y), reaching N4.9 trillion, with total offerings climbing by 4.5% to N4.16 trillion. The spotlight, however, falls on the remarkable 94% surge in auction demand, a testament to heightened liquidity amidst escalating rates.

Heading into H1’24, investors are poised to scrutinize the CBN’s guidance on the rate trajectory during upcoming auctions. The consistent upward trend in auction stop rates across all tenors is expected to persist, serving as a crucial tool for the central bank to manage the money supply in the face of external reserve constraints. Higher auction rates are anticipated to magnetize liquidity into the market, as local investors seek elevated returns, concurrently prompting an increase in NTB supply.

Economic Challenges 

On the Nigerian economy, the Comercio Partners outlook noted that recent developments within the domestic economy underscore significant challenges, including adverse global shocks, unfavorable domestic imbalances, structural rigidities, and unintended consequences of corrective policy measures. The reduction in crude oil production exacerbated economic diversification issues, resulting in a drop in government revenue, foreign exchange inflows, and an increase in public debt and fiscal deficit.

“A comprehensive assessment reveals high and rising inflation, inadequate foreign exchange supply, depreciation of the exchange rate, limited external reserves, weakened output, and high unemployment. These challenges have led to increased interest rates, affecting investments and posing risks to the banking system.

Recent policy changes, such as the removal of the petrol subsidy and the adoption of a floating exchange rate, are anticipated to positively impact the economy in the medium term. These measures aim to enhance investor confidence, attract capital inflows, stimulate domestic investment, and contribute to the stabilization of the domestic currency.

The economic agenda’s ambitious goal of achieving a Gross Domestic Product (GDP) of $1.0 trillion over the next seven years necessitates a thorough evaluation of the banking industry’s adequacy to serve the envisioned larger economy. Concerns about the stability of the financial system in the face of such growth prompted the directive for banks to increase their capital.

Nigeria’s heavy reliance on imported refined petroleum products, constituting over 80% of its consumption, has been a significant economic challenge. The Dangote Refinery aims to alter this landscape by increasing local refinery capacity to meet 100% of Nigeria’s refined petroleum product needs. With estimates indicating potential surpluses for export markets, the refinery’s operations are expected to reduce the country’s vulnerability to global events, contributing to fuel availability stability.

The Dangote Refinery is anticipated to yield substantial foreign exchange savings, as it lessens Nigeria’s dependence on imported fuel. This boost in reserves enhances the country’s capacity to manage exchange rate fluctuations, act as a cushion against external shocks, and instill confidence in the stability of the naira. The resulting increased foreign exchange earnings from refined petroleum product exports further fortify the nation’s economic resilience.