Inside the CBN Manoeuvres that Broke the Open Market Economic Chain and Stabilised the Naira in Record Time

Policy Statement 11

We feel enthused over the acknowledgement, across the country, of the reversal of the spiral downward slope of the Nigeria’s national currency, the Naira, by the Central Bank of Nigeria (CBN). We have observed that the downward slide of the Naira has not only been arrested, but it is gradually stabilizing against mainstream foreign currencies, especially the dollar over the last three weeks. The Naira has appreciated from a low of N1,900/$ on Tuesday, 20th February, 2024 to a high of N1,345/$ on Tuesday 26th March 2024 at the Bureau De Change (BDC) arm of the foreign exchange market.

By our understanding of open market, currency float regime, as adopted by the Federal Government and the CBN, accomplishing this rate reversal within a short span of time, is a feat that is truly worthy of celebration. 

The standard economic feature of a country transiting from a managed foreign exchanged float (a regime where the government determines and set the rate at which its currency is bought or sold against other currencies) is that the adjustment is never easy.

There is clearly a period where things get worse. This is especially the case as soaring import costs that spur inflation and make lives harder for citizens of the country, and for these reasons, the policy is associated with inflicting economic pains on the poor of a country. This is why many Central Banks are reluctant to let the exchange rate fluctuate, a phenomenon known as “fear of floating.”

The experience of Egypt, an African country and the second largest economy in the Arab world after Saudi Arabia, exemplifies the hard time associated with the unification of foreign exchange windows as done by Nigeria. 

Unlike Nigeria, Egypt recently adopted the free-float regime on the prompting of the International Monetary Fund (IMF) as part of measures to address economic dysfunctionalities in that country, especially as related to a foreign currency crisis that has more to do with liquidity than with pricing just as being experienced in Nigeria.  

Again, unlike Nigeria, Egypt secured a $ 35 billion investment from the United Arab Emirates (UAE) and another $ 8 billion loan from the IMF. Soon after the adoption of the open market-determined forex rate, the Egyptian Pound fell beyond 50 pounds against the dollar in the last week of February.

This was after being officially held at about 31 pounds to the dollar for almost a year while it reached more than twice that figure on the black market, leading to inflation figures ratcheting up to 35 percent in February from 30 percent in January. Compared to Nigeria, where the inflation rate moved from 29.9 per cent in January to 31.7 per cent in February. 

In early March, Egypt’s Central Bank hiked policy rate by 600 basis points compared to the 400 basis points in Nigeria. The country also agreed to slow down infrastructure spending and allowed the Egyptian Pound’s value to plummet in exchange for a $ 5 billion expansion of its preexisting loan package from the IMF to $ 8 billion. 

There was no such commitment by Nigeria because its situation was self-determined and organically oriented. 

The influx of cash, combined with the IMF loan into Egypt, has reportedly rectified the government’s foreign currency shortage, at least for now. Comparatively, Nigeria’s government and the CBN do not have the benefits of the kind of huge fiscal intervention made by the UAE and the debt support from the IMF even though the two countries suffer the same economic fate.

Yet, while the situation report from Egypt signposts an economy at its tether end, the Nigerian economy, evaluated by its foreign exchange outlooks currently, may have turned the corner with an attribution of certainty, a major consideration for foreign investors inflow into the country.

Remarkably, by our evaluation, this certainty and reversal of fortunes of the Naira was realized by a combination of professional discipline, conceptualization, and deployment of appropriate policies and capacity to enforce its rules.

In short, the fiscal and monetary policy authorities in Nigeria have found a way of pulling out the chestnuts from the fire by collaborative action and the will to provide a homemade solution. Firstly, by adapting central banking orthodoxy to stabilise the national economy, and secondly, with the fiscal authority committed to plugging resource leakages like the removal of fuel subsidy and securing revenue loss associated with wholesale crude oil theft in the Niger Delta. 

To properly put this in perspective, we need to, as a matter of fact, from the outset, commend the dexterity of the CBN Governor, Olayemi Cardoso, in conceiving policies and deploying them to time and target as he virtually willed into existence a new monetary policy and exchange rate ecosystem. This he had achieved by using policy actions to address both the supply and demand sides of the domestic foreign exchange market.

One of the profound policies introduced to the market on 31st January, in the graduated steps to take charge of the market, was the administrative admonition to Nigeria’s Deposit Money Banks (DMB) to bring their Net Open Position (NOP) to prudential limit by 1st January, 2024. That was just less than a 24-hour notice to the banks. 

CBN’s NOP mandate to the banks implies that no bank holds 20 per cent long position, which is to hold more foreign currency assets than liabilities by more than 20 per cent. The strategic objective of this mandate was to get the banks to start offloading into the open market, about $ 7 billion they kept in long currency positions. That was a manoeuvre to address forex supply side concerns.

On the same day, 31st January, when the CBN relayed the important NOP to banks, the apex financial sector regulatory body also issued the new International Money Transfer  Organisations (IMTO) rules for remittances in Nigeria – the rules, which are actually a bouquet of auxiliary policies, are generally understood to mean occasions of recurring person-to-person (P2P) payments of relatively low value from persons living abroad to persons in their home country which now account for a sizeable portion of Nigeria’s foreign exchange in-flow.

In fact, between 2019 and 2022, Nigerians in the diaspora were reported to have remitted $60.22billion with a total of $168.33 billion in the past eight years (which is estimated to be over ten times higher than the amount of Foreign Direct Investment (FDI) attracted to Nigeria for the same period).

This data is indicative of how remittances could spur economic growth and affect (whether positively or negatively) Nigeria’s volatile currency exchange regime. 

As a result, the Central Bank of Nigeria (CBN) pays very close attention to these transactions, particularly now that they have become an anchor segment of the Financial Technology Companies (fintech) ecosystem, being conducted almost exclusively via digital channels. The most significant change under the new guidelines is the prohibition on banks and fintechs from obtaining IMTO licenses. 

The rules also removed all forms of constrictions on foreign currency transfers starting with the scope of users by expanding users to include transactions on a person-2-person (p2p), business-2-person (b2p) and business-2-business (b2b) basis which until the new guidelines were only permissible with specific approval from the CBN. 

A more impactful feature of the new rule rationalized payment options available for diaspora remittance from bank accounts, mobile money wallets, and cash to only cash and bank accounts. This enabled monitoring and oversight to ensure transparency in forex movement in the country.

Meanwhile, departing from the old guidelines which insisted foreign transfers were paid, strictly, in dollar, and further encourages dollar transaction by paying recipients additional five naira for every dollar received, the new guideline asserts that payout is now restricted to naira. In addition, transfers exceeding the naira equivalent of $200 must be credited to the recipient’s bank account. Naira cash payment equivalent for amounts below $200 will require an acceptable means of identification. 

These, perhaps, have turned the most significant of the bouquet of auxiliary policies. They, in many ways, discourage the dollarization of the economy, another phrase for currency substitution.

Ordinarily, citizens of a country should not see the dollar or any foreign currency for that matter except when travelling out of their country. However, before the coming of the Cardoso-led CBN, most times, the banks are the ones who connect a recipient of international money transfer with the person who will change the dollar. 

Our evaluation of the market indicates that the dollar payment was one of the reasons there was a huge disparity between the official and black markets. If there is no supply to the black market, there will just be a single rate for the dollar.

In formulating the policy on 5th March 2021, the CBN, at that time, claimed that money transfer operators were not channelling transfers to Nigeria through official banking mechanisms. Instead, they were trading the flows in ways that enabled them to exploit differences between the prices of foreign currencies and the naira. As a result, the bank argued that the Nigerian economy was not benefiting as much from remittances as it should. The policy turned a failure in the same sense. It imposed new constraints on receivers. For cash payments, they must physically go into a bank and produce identity cards, afterwards, people will need to exchange the dollars into naira because dollars are not legal tender in the country.

It was, indeed, counterproductive as it led to an increase in the use of informal intermediaries, with diaspora Nigerians sending cash to family members through friends who were travelling to Nigeria, and using unregistered money transfer operators. 

People desiring to send money home were drawn to informal settlement arrangements between senders and receivers or their agents, peer-to-peer transactions, and fintechs, which circumvented the government’s strict requirements for remittance transactions.

When final data were aggregated at the end of 2023, it was realized that out of an estimated $20billion that the World Bank projected will find its way into the Nigerian economy from Nigerians in diaspora, only $2 billion, about 10 percent of the total remittance was formally receipted in the country. Mr Taiwo Oyedele, Chairman of the Presidential Committee on Fiscal Policy and Tax Reforms, gives reasons for this abysmal collection. 

“The World Bank said that for 2023, our diaspora remittance was about $20 billion. We estimate that more than 90 per cent of that did not get to Nigeria. They are being externalized. “We have spoken to loads of Nigerians almost everywhere, in the US, UK, etc. They told us how they sent remittance. They use apps, and we have tried some of those apps. They use parallel market rates. 

“So, you take $1,000 in New York and tap on your phone that you are sending $1,000 to someone, a fintech. 

“They pay the naira equivalent in Nigeria without bringing the dollars.”

The Naira remittance payout policy, was tantamount to a magic wand; with the collections of policies deployed in January and early February, the CBN declared a humongous jump in overseas remittances to $1.3 billion compared to the $300million remitted in January. In addition, the sum of $1 billion was generated from assets purchases by foreign investors. Put together, these sum up to $ 2.3 billion in the economy in the 29 days in February 2024. This is just $ 1.6 billion short of the total $ 3.9 billion inflow recorded in the whole of 2023. 

The CBN was yet to be done. To further enhance the supply side of the market equation, it, perhaps, for the first time in the history of the country, got approval to become the official revenue collection entity of the Nigeria National Petroleum Corporation Limited (NNPCL) following a meeting between CBN and NNPCL Chiefs in Abuja on Thursday, 8th February 2024. We cannot but applaud this monetary policy and fiscal authority embrace for accountability and transparency in revenue collection.

Yet, the most impactful of the slew of policies by the Central Bank did not come until 27th February, the final day of its last Monetary Policy Committee (MPC) meeting when it announced a jump of its Monetary Policy Rate  (MPR), that is, the regulatory benchmark interest rate, by 400 basis point, that is four percent to 22.75 percent. The bank had sustained the monetary policy rate at 18.75 per cent for over six months. This was considered a disincentive to foreign investors who are the major purveyors of forex inflow into the country. 

From innuendos associated with this sentiment, it is believed that most foreign investors consider this rate as constituting a negative real return on their investment relative to inflation rate which in February, was 29.9 percent and had made foreign investors to literally run away from the country’s capital market. The 27th February interest rate hike to 22.75 per cent was a redemption. We have observed foreign investors rushing back to the capital market and snatching up the federal government’s bond and treasury bills and the CBN Open Market Operation (OMO) bills and other classes of fixed income instruments.

Contrary to expectation of a possible abandonment of the stock market part of the Nigeria capital market as a result of the rush to the now attractive fixed income instruments market, foreign and local investors have continued to heavily patronize stocks listed on the Nigerian Stock Exchange (NSE). In the first place, the market had made a 33.71 per cent return in two months to 29th February and had emerged Africa’s best-performing stock market. 

As expected, immediately after the hike in MPR, the NGX all-share index declined by 1.38% to close at 100,582.89 basis points on 28th February but has since appreciated to 104,647.37 basis points, an indication of increased price movement since the last MPR announcement. We, however, note the increase in headline inflation rate to 31.70 per cent for February 2024, which may impact foreign investors’ Nigeria security assets purchase outlook. 

Perhaps, more instrumental to the resurgence of the Naira in the forex market is the clearing of the more than $7billion forex backlogs in form of outstanding CBN commitment on swap deals and due returns to foreign investors who needed to recover forex they imported into the country or those desiring to convert monies earned in local currency in the course of their businesses to forex. 

The inability of the CBN to fund the forex needs of these different economic agents constituted an albatross of sorts on the national economy and was one of the major reasons foreign investors stayed away from the country. With the clearing of the forex backlog, we can submit that the national economy is on the threshold of capacity optimization. The latest in this regard is the sale of dollar to BDCs at the rate of N1,251/$, an indication of the effective rate in the forex market, and for us, it signposts the possibility of increased value of the naira over the next few months.

As the CBN adeptly leads the country through the equivalent of an economic minefield, it is instructive to note that the country’s policy makers in both the fiscal and monetary spheres determinedly asserted on orthodox modeling for which it has been hailed across the globe. Unlike its African peer, Egypt, which is compelled to reform by the dictates of IMF and associated externalities, the Nigerian context speaks to a jurisdiction willing and ready to adopt a string of IMF conditionalities for loan but only on its own terms which for us is an assurance of independence of action that establishes the rights and privileges of a sovereign nation. 

Signed
Chief Niyi Akinsiju, F. Cifian
Chairman,
Independent Media and Policy Initiative (IMPI)

Similar Posts