Despite the marginal gains recorded so far as exemplified by the Naira sustaining rally after the apex bank’s intervention, the monetary and fiscal authorities should not relent on stabilising the currency and guide it to actual value, writes JOSEPH INOKOTONG.

THE flurry of activities that took place last week in the financial services sector of the Nigerian economy was expected. The national currency, the Naira, took a plunge earlier in the week against major currencies like the United State (U.S.) Dollar and the British Pound. Over the course of 10 days, the currency shed 10.78 percent of its value against the dollar before appreciating N1,440/$ in the parallel market on February 2.

Confronted by the imminent collapse of the Naira if left unattended to, the Central Bank of Nigeria (CBN) rose to the occasion. In a spirited effort to stabilise and shore up the value of the Naira, the apex bank doled out a number policies.

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In a bid to douse the prevailing concerns that reverberated across the Nigerian economy due to the downward spiral of the exchange rate, the CBN, within 48 hours, issued four significant policy instruments.

However, it is pertinent to note that when President Bola Tinubu, in the early days of his administration last year, announced the unification of the foreign exchange (FX) markets as one of the pillars to rejuvenate the ailing economy, the policy was lauded by many. One of the by-products of that unification is what Nigerians are experiencing today – a weakened Naira, which has resulted in imported inflation and eroded the purchasing power of the consumers.

Despite this, the CBN, on January 29, issued a circular titled, ‘Financial Markets Price Transparency’ which centered on dealers reporting inaccurate data on executed transactions. The real intent of the circular was its re-affirmation of the policy of “willing buyer and willing seller,” which expects prices to be quoted and displayed in a transparent manner.

The CBN was directing Deposit Money Banks (DMBs) to report transactions in the price that they were helping customers to settle, a sort of “price correction” to achieve market transparency.

On January 29, the Financial Market Dealers Quotations (FMDQ) issued a market notice of revision to the FMDQ FX market rate pricing methodology. The notice was issued late on Friday, January 26 and effective on Monday, January 29, obviously deliberately timed to coincide with the CBN circular on market transparency. The implication of these two actions meant that banks could now sell FX at market rates and FMDQ could accurately report it.

In quick succession, on January 31, the CBN issued a circular on the Harmonisation of Reporting Requirements on Foreign Currency Exposure of Banks. The summary of the circular was an instruction to banks to immediately bring down their long positions to zero percent and their short positions to 20 percent of SHF.

To take long currency positions means that an investor or trader is buying FX with the expectation that its value will rise over time, indicating a sort of betting on the currency appreciation. Analysts say by this circular, the CBN was insinuating that many banks had long positions on the Dollar/Naira.

The implication of this is that banks would have to ensure that their Net Open Position (NOP) is in line with the CBN directive within 24 hours and banks with long open positions higher than zero percent will have to sell the FX to customers.

If implemented to the latter, the action will bring immediate liquidity to the market. Some analysts hold the view that an estimated $5 to $6 billion is kept by banks in long positions, some of it locked up in FX swaps deals. The import of this is that banks will have to immediately provide that liquidity to customers to bring their NOP within the prescribed limits.

Following the 4.25 percent depreciation in the value of the naira between January 29 and 31, the CBN issued two complementary circulars to commercial banks and International Money Transfer Operators (IMTOs) to address price discovery and market distorting restrictions.

On January 31, the CBN issued another circular focused on International Money Transfer Operators (IMTOs) titled, ‘emoval of Allowable Limit of Exchange Rate Quoted by IMTOs.’ Before the issuance of this circular, there was a +/- 2.5 percent on the Nigerian Autonomous Foreign Exchange (NAFEX) rate in which they are allowed to deal but that limit has now been removed. They can now deal on the prevailing market rate based on the ‘willing buyer and willing seller’ principle.

Diaspora remittances in Nigeria estimated at $25 billion yearly are reported to have gone down to virtually $0 in 2023. It, therefore, implies that with this policy in place, the remittances may be coming directly into the country. The report had it that the FX inflows were just not coming into Nigeria, rather the Dollar/Naira was being converted by IMTOs but the Dollar remained offshore and never flowed into Nigeria.

Part of the reason remittance flows were not coming into the country was because the margins were capped (at +/-2.5 percent), which made the IMTOs resort to settling offshore instead of bringing the liquidity in. With this new circular, IMTOs will be expected to release the inflow in the Dollar as there is no excuse in terms of rate why they should not. With the policy in place, it remains to be seen if the IMTOs will follow the lead of the CBN.

The CBN has also fixed $1 million as the minimum share capital requirement for International Money Transfer Operators (IMTOs) in the country in its revised guidelines for the operation of IMTOs, which were officially released via its website and signed by the Director, Trade and Exchange Department, Dr Hassan Mahmud. The latest directive followed policy reforms to boost the foreign exchange market in Nigeria and encourage fund remittance through legal channels.

The CBN has also overhauled the Cash Reserve System, effecting a change in the Cash Reserve Requirement (CRR) set by the last Monetary Policy Committee (MPC) meeting.

In the circular sent to all banks by the acting Director of Banking Supervision, Dr Adetona Adedeji, the CBN pointed out that the new “Cash Reserve Requirement (CRR) mechanism is intended to facilitate your capacity for planning, monitoring and aligning your records with the CBN.”

The policy is designed to present the banks with ample flexibility in managing their reserves while also encouraging increased lending to businesses and individuals. In the past, a fixed percentage of banks’ deposits, currently 32.5 percent for commercial banks, was automatically deducted daily by the CBN as CRR. However, the new system applies a phased approach with key changes.

According to the apex bank, in the first phase, which adopts an incremental approach, the existing CRR percentage, 32.5 percent, will no longer be applicable daily. Rather, they will be applied only to increases in banks’ weekly average adjusted deposits. This implies that fresh funds received by banks, either as customer deposits, loan repayments, or other inflows, will have the designated CRR portion set aside as reserves. This method presents the banks with the flexibility to manage their overall liquidity and planning for future reserve needs.

The second phase encourages lending through Loan-to-Deposit Ratio (LDR) compliance introduces a dynamic element based on banks’ adherence to the minimum LDR currently set at 65 percent. Failure by banks to meet the LDR target will entail facing an additional 50 percent CRR on the “shortfall” in lending, which increases their effective CRR and, in turn, encroach on their available funds for lending and encourage them to meet the LDR requirements.

Although the circular added that the CBN will provide details to banks on the applied CRR charges and their calculation rationale, ensuring transparency, it is obvious that certain benefits abound as banks will no longer be confronted with daily fluctuations in their reserves. This potential positive impact will make way for better financial planning and stability. The CBN added that it will closely monitor the implementation of the new system and make adjustments as needed. However, by encouraging banks to meet LDR targets, the import of this move centres on increasing credit availability for businesses and individuals thereby boosting economic activity.

The real impact of this policy on interest rates and availability of loans cannot be determined at the moment due to the interplay of market dynamics and how each bank evolves its strategies will act as determinants.

The CBN also raised the exchange rate for cargo clearance from N952/$ to N1.356 per dollar. Only last November, the rate was increased from N783/$ to N952/$ and in December, from N783/$ to N952/$.

The measures so far adopted to prop up the naira’s value seem to pay off as the Naira’s fall against the dollar has slowed in the past few days. The national currency closed the week at N1,435.53/$ on Friday after falling to an all-time high of N1,482.57 /$ on Tuesday at the official window. This indicates 3.17 percent appreciation for the naira, which started the week poorly. On Monday last week, the naira began its worst journey of trading on the official window at N1,348/$ following the review of exchange rates calculation by the FMDQ Security Exchange.

In spite marginal gains recorded so far as exemplified by the Naira sustaining rally after the apex bank’s intervention, the monetary and fiscal authorities are not relenting on their efforts to stabilise the national currency and guide it to attain its actual value.

In furtherance of this goal, the Federal Ministry of Finance and the CBN have begun work on fresh initiatives to rescue the Naira. The Minister of Finance and Coordinating Minister for the Economy, Mr Wale Edun, Friday last week, met with the governor of the CBN, Olayemi Cardoso and chairman of the Economic and Financial Crimes Commission (EFCC), Ola Olukoyede, to strategise on stabilising the beleaguered currency. This happened on a day the naira was reported to have sustained its rally against the dollar, closing at N1,440 at the parallel market, representing N10 gain from the N1,450 to Dollar recorded on Thursday last week.

Concerted efforts are required from both the monetary and fiscal authourities to push the naira to find its bearing. Pursuing this goal in a manner that will culminate in achieving the desired goal requires tact and tenacity. A searchlight should be beamed on those hoarding and trading on the FX illegitimately and appropriate sanctions meted on either the defaulters or those found wanting.

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