The Central Bank of Nigeria (CBN) led by Mr Olayemi Cardoso has been in the eye of the storm in the last 8-months of the President Bola Tinubu Administration. The Government’s decision to ‘freely float’ the Naira, which led to a rapid decline in the value of the Naira against the United States Dollar (USD) has been criticized for the poor planning and incoherent execution of the policy. The Government’s rationale to float the currency – to unify the several exchange rates, and limit unlawful roundtripping – was not unreasonable; however, as with most policy actions, the devil is in the execution.
It was clear to the trained eye that the Government was not prepared for the fallout from the free float nor did it envision the dire consequences of its policy action. The policymakers had underestimated the opaqueness in the Nigerian currency markets, as well as the structural macro-economic issues plaguing key export sectors of the Nigerian economy – Oil & Gas. In other words, the price discovery mechanism in the foreign exchange market was broken, and this left the Government scrambling, when the Naira was trading at over 1000 Naira to $1 in February 2024 – a level that most experts believe is speculative and overvalued.
The CBN in a firefighting manner, introduced a litany of policy changes to the foreign exchange market through various circulars targeted at Authorized Dealers and market participants, in a bid to stop the freefall of the Naira. Also, the law enforcement agencies proceeded to arrest Bureau De Change operators, and perceived speculators; including restricting access to crypto exchange platforms, most popularly Binance from operating in Nigeria. In March 2024, the CBN announced that it had fulfilled its forward contract obligations, and all legitimate backlog foreign exchange obligations had been cleared – this was supposed to improve confidence in CBN’s ability to meet currency demand. The effects of these announcements and policy changes on the market are yet to be seen, as the exchange rate continues to be volatile.
As Nigerians were focused on the unstable daily exchange rates of the Naira to the USD, the effects of the depreciating Naira were immediately felt, as prices of food items, and other related commodities skyrocketed. The price of imported goods climbed sharply as traders were forced to face the realities of an uncertain foreign exchange market. This led to irrational pricing of goods, and speculation particularly as the payment of custom duties on imported items is priced in Naira equivalent of the prevailing exchange rate, further contributing to the inflationary pressures. It was certain that we were dealing with immediate shocks of the currency depreciation.
The devaluation of the Naira to the USD meant that more Naira was now required to purchase fewer dollars for the commodities priced in the international market. For example, an importer of equipment spare parts or proceed food items, priced at $100 on the international market, who had previously paid 75,000 naira, sourced a rate of N750 – 1$ in November 2023, now had to pay N150,000 for the same commodity priced at $100 in February 2024. The importance of the stable exchange rate in a trading economy like Nigeria’s cannot be overstated, and the USD is an important aspect of the trade and our economy.
At the 293rd CBN Monetary Policy Committee meeting, the CBN raised the prevailing monetary rate from 18.75% to 22.75% and also increased the Cash Reserve Ratio for Banks to 45% in a bid to stem the rising inflation. The MPR was further increased at the 294th meeting to 24.75%. The wisdom behind this decision is debatable, considering that the main inflationary pressure on commodities, was not as a result of too much money chasing fewer goods, but because of food shortages as a result of rising insecurity and uncertainty in the foreign exchange market for imported items. The rationale for the increase in the MPR and CRR is for the CBN to mop and retain, the excess cash in the banking system. Considering that the prevailing interest rates are high, government securities become more attractive to the Banks, and a haven for their depositor’s monies. The CRR component is a portion of the total deposits required to be set aside by a Bank, and the increase in the rate is to ensure that Banks have less cash to deal with in intermediating with the real economy. Also, the increased CRR and MPR, encourage individuals to save more in the Banks, as they will receive more interest for their money.
On the flip side, the increase in the MPR and CRR makes lending, which is the primary responsibility of the banks, more expensive for borrowers who operate in the real economy and may lead the economy to contract. As interest rates and repayment on new or existing loans become more expensive, there is a tendency for default, and accumulation of bad loans.
The viability of raising interest rates to tackle inflation in Nigeria is debatable, considering that all previous efforts to tame inflation using the MPR and CRR monetary tools have failed to produce the desired positive results, as the headline inflation numbers increased to 31.7% and food inflation rose to 34.5% in February 2024.
On 28 March 2024, via a circular directed to the Banks, the CBN informed the Banks that the Capital Requirement is now revised upward to 500 billion Naira for International Banks; 200 billion Naira for National Banks, and 50 billion for Merchant Banks effective March 2026. The CBN in an explainer issued alongside the circular stated that the increase in the capital requirement is to strengthen the Banks to be viable to support the Government’s vision for a $1 trillion economy by 2030. Lofty aspirations by the apex Bank, to reposition the Banking sector with new injection of cash. The immediate reaction to this policy change is that the CBN is seeking to create stronger Banks to better withstand negative economic shocks and support growth. Also, many Banks would be forced to become more efficient, if they are to attract new capital whether through foreign portfolio investment, or local capital raise, to meet the new CBN cash requirement, which ultimately is beneficial for the future of the Nigerian economy going forward.
In conclusion, the CBN has been really in the eye of the storm as its policy decisions have become more scrutinized than ever. Outside of the Naira re-design policy of the Central Bank in October 2022, led by Godwin Emefiele, the CBN’s policy direction has never so interested the average Nigerian. The CBN which is responsible for the formulation of monetary policy, and regulation of the Banks, is now in de facto control of the economy. The Ministry of Finance, which is responsible for Economic and Fiscal policy has passed the buck to the CBN, and now Mr Cadoso’s is on the hot seat.
It is too soon to say whether or not the policy decisions of the CBN in managing the economy are delivering positive results, but we can state that the CBN under Cardoso has been active, responsive and vigilant. The key to competent regulatory oversight is simplicity and transparency, which has been lacking. Until the foreign exchange market is made simple and reporting obligations by participants transparent, we may continue to have the same issues.
