CBN’s optimism and Naira’s performance in FX market

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The Central Bank of Nigeria (CBN) has expressed optimism that the reforms it has implemented in the foreign exchange market will stabilise it, and improve the value of the Naira despite the continuous slide against the dollar, writes JOSEPH INOKOTONG.

THE Central Bank of Nigeria (CBN) has implemented many policies in the last couple of weeks in a deliberate effort to stabilise the Naira in the foreign exchange (FX) market, and sure up its value against other foreign currencies.

Despite these measures put in place by the apex bank to enhance the appreciation of the local currency, Nigerians are still adamant in their agitation for a better value of the Naira.

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Their complaints are situated on the premise of a lack of marked appreciation of the Naira’s value in the FX market after the CBN had rolled out measures to stop the fall. Although there appears to be some improvement; they are not visible enough for the uninitiated.

At the close of business last week, the Naira was reported to have recorded some level of appreciation at the official, and unofficial FX markets. Some reported that the naira was at a record low despite improving FX liquidity.

However, data from the Nigerian Autonomous Foreign Exchange Market (NAFEM) showed that the local currency naira appreciated to N1, 469.97/US$ on Friday compared to N1,479.47/US$ on Thursday. This happened at a period when the CBN directed that the naira would now be the currency for international transfers facilitated by International Money Transfer Operators (IMTOs).

At the parallel market, dealers in Abuja said N1,485/US$ was the buying rate and N1,490/US$ selling on Friday.

The local currency at the Lagos unofficial market also recovered some grounds to N1,490 to the dollar compared to N1,500/US$ which it exchanged for, on Thursday and Wednesday, February 08 and 07 2024 according to Bureau De Change sources.

Earlier, the Naira had shaded some weight against the dollar at the official market following a drop in foreign exchange (FX) sales by banks on Thursday. Dollars sold by banks via willing buyers and willing sellers decreased by 6.13 percent to $321.23 million on Thursday from $342.22 million recorded on Wednesday.

Nigeria’s naira dropped to a record intra-day low against the dollar on Friday, LSEG data showed, following a devaluation last week, its second adjustment in less than a year, despite the central bank saying liquidity was improving.

Central Bank Governor Olayemi Cardoso said last week Friday that over $1 billion had come into the economy in the last few days to buy Nigerian Treasury bills after it auctioned one trillion naira, about $678.60 million, worth of notes that were oversubscribed.

He told lawmakers that the measures taken by the apex bank to improve dollar supply have tamed currency volatility, and added that forex demand had to be moderated for these measures to be sustainable.

Within the week, the CBN hiked open market rates to 19 percent from under 12 percent to draw investors to bills that had been almost dumped in preference to equities as inflation climbed to a nearly three-decade high and lagged behind the benchmark Monetary Policy Rate (MPR) of 18.75 percent.

The CBN also scrapped caps on interbank forex spreads. Mr Cardoso explained the measure thus: “These measures, aimed at ensuring a more market-oriented mechanism for exchange rate determination, will boost foreign exchange inflows, stabilise the exchange rate, and minimise its pass-through to domestic inflation.”

Nigeria, Africa’s largest economy has been experiencing a crippling dollar shortage that has pushed the Naira to record lows in recent weeks. In the midst of this, Mr Cardoso has maintained that dollar liquidity was improving.

At a time this year, the official naira exchange rate had plunged to as low as 1,531 per dollar from 900, well below black market levels after a change was effected by the market regulator on its closing rate calculation methodology.

Then, the local currency fell to as low as N1,540 intra-day, dropping lower than the N1,449.27 quoted on the unofficial parallel market.

Despite these developments in the FX market, the CBN remains upbeat in its position that the reforms it has implemented in the foreign exchange market will stabilise the market and improve the value of the Naira. It hinged its optimism on the narrowing premium between the Bureau De Change (BDC), and the official rate to 12.0 percent end-January 2024.

The Bank’s Deputy Governor, Economic Policy, Mr Muhammad Abdullahi while declaring open the 2023 Economic Policy Directorate Retreat of the Bank with the theme: “Foreign Exchange Market Reforms and Price Stability in Nigeria” in Abuja reiterated that the reforms the Bank has implemented in the foreign exchange market will stabilise the market and improve the value of the Naira.

He pointed out that the premium between the BDC and the official rate had narrowed to 12.0 percent in end-January 2024 from 61.93 percent in January 2023. He added that the narrowing between the official and unofficial markets validated the impact of policy actions by the Bank, despite hedging and speculative activities.

While acknowledging that some challenges remained as inflationary pressures continued to pose substantial downside risks to domestic and international investment and the overall macroeconomic policy objective of ensuring sustainable growth, the CBN Deputy Governor said that the steps so far taken by the Bank to unify the exchange rate and stabilise the foreign exchange market were far-reaching.

Furthermore, Mr Abdullahi enumerated the steps taken by the Bank including the re-adoption of the “willing buyer, willing seller” market-determined rate and the lifting of access restriction to forex from the Nigerian foreign exchange market on some 43 items to eliminate distortions in the forex market. He also recalled that the Bank had cleared a significant portion of the FX backlog from matured forward contracts and was collaborating with the fiscal authorities to coordinate policy initiatives to stimulate foreign investment.

To mitigate the challenges experienced in stabilising the foreign exchange market, he said the CBN harmonised the reporting requirements on foreign currency exposure of banks and issued revised guidelines for International Money Transfer services in Nigeria to enhance ease of doing business for International Money Transfer Operators (IMTOs), boost remittance and other capital inflows, limit the outflow of foreign currency and illegal financial flows.

According to him, other measures taken include the removal of the allowable limit of the exchange rate quoted by IMTOs to liberalise further the Nigerian foreign exchange market and the issuance of a circular on financial markets price transparency to enhance efficient price discovery and orderly conduct in the foreign exchange market.

Abdullahi highlighted that “We have a renewed focus on the core mandate of the Bank, which is to maintain price stability, while delivering interest and exchange rates that create a conducive environment for investment and economic growth. This is reinforced by our commitment to bringing inflation and exchange rates within our medium-term target using all policy and strategic tools at our disposal.”

The Director of the Research Department, Ms. Aderinola Shonekan, earlier in her welcome address noted that the Bank had undertaken bold reforms to address some of the challenges and structural constraints the economy currently faces. She said the retreat sought to generate valuable insights and actionable recommendations to guide monetary policy decisions under the new inflation-targeting framework.

To underscore the importance of the event, participants at the retreat were drawn from the Research, Monetary Policy, Trade and Exchange, Statistics, and Financial Markets Departments of the Bank, as well as strategic external stakeholders.

The CBN is due to hold its first rate-setting meeting under Cardoso on February 26, about six months after the last one was held. Many analysts are expecting the bank to tighten rates by at least 200 basis points to 20.75 percent to effectively tackle the prevailing situation.

Cardoso’s assertion that the CBN’s measures, “Indeed, have already started yielding early results with significant interest from foreign portfolio investors that have already begun to supply the much-needed foreign exchange to the economy,” remains to be seen how this will holistically impact positively on the FX market.