MARKET NEWS

The Central Bank of Nigeria (CBN) Governor Olayemi Cardoso outlined the gains of the financial sector reforms on businesses and the economy, stressing that while the economic reforms were difficult, they have started bearing positive results.

Cardoso pointed to stability in exchange rate, stronger economic buffers, dip in inflation numbers, increased foreign investors’ participation and improved sovereign rating as evidence of the early success of macroeconomic reforms.

The impact of orthodox monetary policy adoption and reforms on the exchange rate has continued to reverberate across key sectors of the economy.

The CBN chief said the reforms would be sustained because they have helped the economy to navigate a difficult path to a point of stability.

Basically, the world economy has weathered significant storms over the past two years following the COVID-19 pandemic: the impact of the Russia-Ukraine war on energy and food prices, the surge in global inflation and the subsequent tightening of monetary policy in advanced markets.

In light of these global challenges, it is imperative to sustain and enhance reforms aimed at strengthening our economic buffers to withstand external shocks.

For Cardoso, this requires a steadfast focus on curbing inflation, ensuring fiscal discipline, and advancing initiatives that promote greater economic diversification.

Upon assuming office in October 2023, the apex bank under his leadership prioritised reforms to rebuild Nigeria’s economic buffers and strengthen resilience.

Inflation, which had surged to 27 per cent, was one of the most pressing challenges, partly driven by excessive money supply growth. While the GDP growth had stagnated at a meagre 1.8 per cent over the previous eight years, money supply expanded rapidly, averaging about 13 per cent growth annually.

This imbalance not only fueled inflation but also contributed to a significant depreciation of the naira.

Besides, inflation creates uncertainty for households and businesses, acting as a silent tax by eroding purchasing power and driving up living costs.

To tackle the pressing challenge of inflation, the CBN acted decisively by raising the Monetary Policy Rate by 875 basis points to 27.5 per cent in 2024—an essential move to contain inflation and restore stability.

Read also: CBN cuts Ways & Means by 59% in boost for reforms

FX backlogs cleared

In the foreign exchange market, the country faced a backlog of over $7 billion in unfulfilled commitments and a fragmented FX regime characterised by multiple forex rates, which had encouraged arbitrage opportunities.

This regime stifled much-needed foreign investment and led to the depletion of our external reserves which fell to $33.22bn in December 2023. It must also be understood that the cost of the FX subsidy regime is estimated to far exceed that of fuel subsidies.

The apex bank has also undertaken critical reforms to unify Nigeria’s exchange rate, eliminating distortions and restoring transparency. This unification has enabled it to clear the outstanding foreign exchange obligations, giving businesses—ranging from manufacturers to airlines, the confidence to plan and invest in the future.

To further enhance the functionality of the foreign exchange market, the CBN introduced an electronic FX matching system, which has proven effective in other markets.

With these developments came positive Fitch Ratings on Nigeria economy, signaling positive fallout from the reforms.

The global rating agency said that from exchange rate unification to reduce arbitrage in the markets, introduction of electronic FX matching platform and a new FX code to enhance transparency and efficiency in the market as well as deployment of monetary policy tightening to keep inflation on check, the Central Bank of Nigeria (CBN) has demonstrated commitment to achieving sustainable economy growth and exchange rate stability.

Already, the latest Fitch rating moved Nigeria’s long-term foreign-currency issuer default rating (IDR) from negative to stable, meaning that the country stands a better chance of attracting foreign investment, borrowing money on international markets at better interest rates, and boosting investor confidence.

Fitch also applauded the government’s commitment to policy reforms implemented since its move to orthodox economic policies in June 2023, including exchange rate liberalisation, monetary policy tightening, and steps to end deficit monetisation, as well as fuel subsidies removal.

“These have improved policy coherence and credibility and reduced economic distortions and near-term risks to macroeconomic stability, enhancing resilience in the context of persistent domestic challenges and heightened external risks,” the agency stated.

Read also: CBN’s N9.4trn FX revaluation loss wipes out 2024 operating gains

Other policy measures

The apex bank recently took a strategic step to enhance transparency and boost market confidence with the inauguration of the Nigeria Foreign Exchange Code (FX Code) in Abuja. The FX Code has so far ignited naira stability at both official and parallel markets.

Cardoso recently launched the FX Code, emphasising integrity, fairness, transparency, and efficiency as critical pillars for driving Nigeria’s economic growth and stability.

He emphasised that the FX Code was built on six core principles: ethics, governance, execution, information sharing, risk management and compliance, as well as confirmation and settlement processes.

These principles, he explained, aligned with international standards while addressing the unique challenges within Nigeria’s foreign exchange market.

According to Cardoso, “The FX Code represents a decisive step forward, setting clear and enforceable standards for ethical conduct, transparency, and good governance in our foreign exchange market. The era of opaque practices is over. The FX Code marks a new era of compliance and accountability. Under the CBN Act 2007 and BOFIA Act 2020, violations will be met with penalties and administrative actions.”

The CBN has stated that while every effort has been made to ensure that the FX Code comprehensively addresses various aspects of market conduct and practice, it is not intended to be exhaustive.

Governor Cardoso also noted that the journey towards market reform is already yielding results. He stated, “The year 2024 was marked by structural reforms that sought to return the naira to a freely determined market price and ease volatility as several distortions were removed from the market.”

Beyond the foreign exchange market, the FX Code forms part of the CBN’s renewed focus on compliance across the financial sector. Its six guiding principles, alongside 52 sub-principles, were designed to become the benchmark for conduct across all participating institutions.

Issued as a guideline for the foreign exchange market, the FX Code is backed by the authority of the CBN Act of 2007 and the Banks and Other Financial Institutions Act (BOFIA) of 2020.

These legislative instruments empower the CBN to establish and enforce directives regarding the standards financial institutions must follow in conducting foreign exchange business in Nigeria.

The FX Code, therefore, serves as an official directive that all market participants are expected to observe in their operations.

Besides FX Code, the apex bank also introduced the Electronic Foreign Exchange Matching System (EFEMS), which has proven effective in other economies in enhancing the functionality of the foreign exchange market.

The EFEMS was meant to check forex market distortions, eliminate speculative activities and instil transparency. The EFEMS, which is commonplace in developed and developing markets, offers real-time information on currency rates, trading volumes, and market activity.

Policies attract more dollar inflows

As part of its efforts to boost diaspora remittances and support naira stability, the CBN recently announced the introduction of two new financial products designed to serve Nigerians living abroad.

The Non-Resident Nigerian Ordinary Account and the Non-Resident Nigerian Investment Account was created to streamline remittances, encourage investments, and foster financial inclusion among Nigerians in the diaspora.

It said, “The Central Bank of Nigeria is pleased to inform the general public of the introduction of the Non-Resident Nigerian Ordinary Account and Non-Resident Nigerian Investment Account targeted at Nigerians in diaspora.”

The initiative is also expected to provide a secure and efficient platform for managing funds and investing in Nigeria’s financial markets.

Since the beginning of this year, eligible NRNs have continued to get the opportunity to own any of the Non-resident Nigerian accounts.

The Non-Resident Nigerian Ordinary Account was designed to facilitate remittances by allowing non-resident Nigerians to remit foreign earnings into Nigeria and manage funds in foreign currency or naira.

Deposits from sources such as salaries, allowances, and dividends are supported, alongside spending on family maintenance, education, and healthcare.

On the other hand, the Non-Resident Nigerian Investment Account provides an opportunity for NRNs to invest in Nigeria’s financial markets, including foreign currency-denominated bonds, fixed deposits, and local assets like equities, government securities, and mortgage products.

The CBN explained that both accounts offer currency flexibility, enabling holders to maintain balances in either foreign currency or naira.

Account holders will also be able to convert funds between the two currencies at prevailing exchange rates through authorised dealers.

The Non-Resident Nigerian Investment Account, in particular, was structured to promote investments in Nigeria’s financial instruments, such as the Diaspora Bond, and encourage active participation in the country’s economic development.

The CBN said the introduction of these accounts will harness the economic potential of Nigerians in the diaspora by boosting remittances and fostering investments in critical sectors.

These and other measures, including the granting of licenses to new International Money Transfer Operators (IMTOs), implementing a willing buyer-willing seller model, and enabling timely access to naira liquidity for International Money Transfer Operators (IMTOs).

Diaspora remittances are a crucial source of foreign exchange for Nigeria, supplementing both foreign direct investment and portfolio investments.

The CBN’s initiatives have supported continued growth in these inflows, aligning with the institution’s objective of doubling formal remittance receipts within a year.

The remittances in the economy is expected to increase based on CBN’s ongoing efforts to bolster public confidence in the foreign exchange market, strengthen a robust and inclusive banking system, and promote price stability, which is essential for sustained economic growth.

In a report, “Diaspora remittances: The power behind Africa’s sustainable growth”, Regional Vice President of Africa at Western Union, Mohamed Touhami el Ouazzani, said remittances may be measured through the movement of money, but their real impact is measured in lives changed.

He disclosed that in 2023 alone, $90 billion flowed into Africa from its global diaspora, an amount that rivals the Gross Domestic Product of entire nations.

He said that remittances symbolise deep ties that keep communities connected across borders, “Families with a breadwinner working abroad depend on these funds to provide vital support for day-to-day needs. They also build the foundation for broader financial stability,” he said.

“Beyond their immediate impact, remittances are powerful drivers of economic change. They fuel infrastructure development, spur entrepreneurship, and promote financial inclusion – all essential for long-term economic development. Ghana’s National Financial Inclusion and Development Strategy (NFIDS) is simplifying access to remittances, while countries like Kenya, Ethiopia and Nigeria are tapping into diaspora bonds to fund infrastructure and other national projects,” he added.

For remittances to be truly transformational, it begins with understanding and meeting people’s aspirations. Ensuring individuals who strive for more can send and receive funds, regardless of their financial status, is crucial. We must cater to diverse needs.

“In a continent renowned for its entrepreneurial spirit, offering multiple channels for remittance access is key. Whether through bank accounts, digital wallets, mobile money apps, or cash pickups, this flexibility ensures that funds are delivered in ways that best suit local realities. Providing innovative and inclusive solutions empowers individuals to not only manage their immediate needs but also to invest in long-term growth opportunities,” he added.