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CBN Grapples With Naira Depreciation, Soaring Inflation - NEW TELEGRAPH

MAY 30, 2024

Having been sworn in as the country’s President on May 29 last year, President Bola Tinubu was less than two weeks into the job, when he suspended then Governor of the Central Bank of Nigeria (CBN), Mr. Godwin Emefiele, from office.

According to a statement issued by the Office of the Secretary to the Government of the Federation, Emefiele’s suspension was sequel to an investigation of his office and the planned reforms in the economy’s financial sector. The statement said that Emefiele had been directed to immediately hand over the affairs of his office to the Deputy Governor (Operations Directorate), Mr. Folashodun Shonubi, who would act as CBN Governor pending the conclusion of the investigation and the reforms.

Tinubu’s reforms

However, even before he removed Emefiele, President Tinubu, had in his inaugural speech, announced two major economic reforms. These included ending debilitating petrol subsidies and ensuring a unified exchange rate. Indeed, with Shonubi at the helm of affairs, the CBN on June 14, last year, announced that all FX windows had been collapsed into the Investors & Exporters (I&E) window.

Although the reforms fuelled excitement both at home and abroad about the likelihood of money finally starting to flow back into the country’s economy which had been reeling from the exit of foreign investors, there were concerns about how the government would tackle their inflationary impact. For instance, KPMG Nigeria predicted in a report that the fuel subsidy removal would likely push the inflation rate to 30 per cent from 22. 41 per cent in May. The report said: “The World Bank projects that a one-off adjustment( for fuel price) will lead to higher inflation in 2023 and 2024 and lower thereafter.

Our internal macro model also supports the World Bank’s findings with a forecast of an increase of about six per cent over the June 2023 inflation rate bringing it to about 30 per cent. “In mid-2024, however, all other things remain constant, and as yearon-year base effects kick in, the pace of inflation will drop significantly though overall prices of goods and services will remain elevated. However, as inflation is already high and will increase further, more Nigerians will be pushed into poverty unless compensating measures to cushion them at least partially from the price shock are put in place.

Nomination of Cardoso and deputy governors

Concerns about how inflation would be tackled further increased when President Tinubu in September last year, nominated Olayemi Cardoso as the new Governor of the CBN. The President also nominated four new Deputy Governors for the apex bank, namely Emem Nnana Usoro, Muhammad Sani Abdullahi Dattijo, Philip Ikeazor and Bala M. Bello.

Following the Senate’s confirmation of the nominations of Cardoso and his team on September 26, all eyes were on the apex bank to roll out measures to tackle inflation and halt the decline of the naira triggered by the unification of the exchange rates.

Cardoso’s CIBN address

Indeed, the Chartered Institute of Bankers of Nigeria’s (CIBN) annual bankers’ dinner held on November 24, which was Cardoso’s first major public outing as CBN Governor, attracted a lot of attention among financial experts and stakeholders. In his address at the event, Cardoso announced that the CBN planned to tighten policy over the next two quarters to manage inflation, after restarting its Open Market Operations (OMO) to help rein in money supply.

H said: “The Central Bank of Nigeria is committed to achieving monetary and price stability. This is not just a technical objective, but it has real-life implications for the wellbeing of our citizens. Through targeted policies, transparent market operations, and coordination between monetary and fiscal authorities, we can ensure a more stable exchange rate, control inflation, and create an enabling environment for businesses and individuals to thrive.

“In line with our strategy to refocus on our core mandate, the CBN will discontinue direct quasi-fiscal interventionist activities and instead utilize orthodox monetary policy tools for implementing monetary policy.” He disclosed that since the new management team, under his leadership, took charge at the CBN, it had “critically reviewed the effectiveness of the Central Bank’s monetary policy tools and have spent time fixing the transmission mechanism to ensure the decisions of MPC meetings actually result in desired objectives.”

NESG economic outlook address

Similarly, in his address at the 2024 macroeconomic outlook launch hosted by the Nigeria Economic Summit Group (NESG) in Lagos on January 24, Cardoso disclosed that the CBN was aiming at an inflation rate of 21.4 per cent this year. He stated: “Inflationary pressures are expected to decline in 2024 due to the CBN’s inflation-targeting policy, which aims to rein in inflation to 21.4 per cent.

This will be aided by improved agricultural productivity and the easing of global supply chain pressures, benefiting businesses by boosting consumer confidence and purchasing power.” According to the CBN Governor, “the outlook for decreasing inflation in 2024 will have a profound impact on businesses, providing a more predictable cost environment and potentially leading to lowered policy rates, stimulating investment, fueling growth, and creating job opportunities.”

Forex reforms

He also dwelt extensively on the measures that the apex bank was taking to ensure exchange rate stability. He said that the naira was undervalued, adding that the CBN would collaborate with the fiscal authorities to accelerate “genuine price discovery in the near term,” revealing that the regulator expects stability in the forex market this year.

Cardoso also disclosed that the CBN was receiving more foreign exchange inflows as a result of its collaboration with the Ministry of Finance and the Nigeria National Petroleum Company Ltd (NNPCL), stating that the coordinated effort would significantly enhance the apex bank’s FX flows and contribute to the accretion of reserves this year. He said: “The expected stability in the foreign exchange market for 2024 can be attributed to the reduction in petroleum product imports and the recent implementation of a market-determined exchange rate policy by the CBN.

This reform is designed to streamline and unify multiple exchange rates, fostering transparency and reducing opportunities for arbitrage. The resulting consistent and stable exchange rate will not only boost investor confidence but also attract foreign investment, elevating Nigeria’s appeal to global investors. “We are implementing a comprehensive strategy to improve liquidity in our FX markets in the short, medium, and long term.

Our focus is on addressing fundamental issues that have hindered the effective operation of our markets over the years.” As part of its strategy to improve liquidity in the FX markets, the CBN in late January issued a circular in which it warned that it would sanction authorised dealers and their customers found to be reporting, “inaccurate and misleading information” on foreign exchange and fixed income transactions.

The apex bank followed up on the issuance of the circular by releasing a letter to lenders in which it announced limits on how much banks can hold in foreign currencies even as it expressed concern about the growth of forex exposures on the lenders’ balance sheets. In the letter entitled, “Harmonisation of Reporting Requirements on Foreign Currency Exposures of Banks,” the CBN announced a limit on lenders’ netopen positions of 20per cent of shareholders’ funds for short positions and a zero limit for long positions and ordered banks to harmonise reporting.

First MPC meeting under Cardoso

Interestingly, at the apex bank’s first Monetary Policy Committee (MPC) meeting, under Cardoso’s tenure, held on February 26 and 26, 2024, members of the committee voted to hike the benchmark interest rate- the Monetary Policy Rate (MPR) by a substantial +400bps to 22.75 per cent from 18.75 per cent-the highest level recorded since 2006- and increase the Cash Reserve Ratio (CRR) from 32.5 per cent to 45.0 per cent.

In its reaction, a financial advisory firm, Comercio Partners, argued that apart from the fact that the MPC’s decisions may not immediately bring down inflation, they were likely to impose greater strain on economic activities and could “exacerbate the unemployment issue confronting the Nigerian economy.”

February inflation data

In fact, February inflation report released by the National Bureau of Statistics (NBS) on March 15, showed that the annual inflation rate rose to 31.70 per cent in February from 29.90 per cent in January. The NBS attributed the rise in annual rate of food inflation to increased prices of bread and cereals, potatoes, yam and other tubers, fish, oil and fat, meat, fruit, coffee, tea, and cocoa.

Naira’s rebound

However, if the CBN’s measures did not seem to be reining in inflation, their impact was beginning to be felt in the foreign exchange market. Reason: the naira which had fallen to a record low of about N1,800 per dollar at both the official and parallel FX markets in February, appreciated to N1,431/$1 on the official market on Friday, March 22, 2024, the best rate since February 5th when it closed at N1419.86/$1. Traders attributed the naira’s significant appreciation in the official market to the CBN’s forex reforms.

Revocation of licences of 4,173 BDCs

The reforms were also extended to the Bureau De Change(BDC) segment of the forex market, which resulted in the revocation of the operational licenses of 4,173 BDCs and resumption of forex sales to eligible BDCs.

Final settlement of forex backlog

Analysts, however, said that a key factor that led to the naira’s recovery in the forex markets at that time was the CBN’s recent announcement that it had concluded the payment of $1.5 billion to settle obligations to bank customers, effectively settling the residual balance of the FX backlog. According to the Acting Director, Corporate Communications Department at the apex bank, Mrs. Hakama Sidi-Ali, the move fulfilled a key pledge of the CBN Governor, Mr. Cardoso, “to process an inherited backlog of $7 billion in claims.”

MPC March meeting outcome

With the forex reforms helping to boost the naira, all twelve members that attended the MPC’s meeting, in March, voted to continue with the monetary tightening policy. Thus, the committee increased the MPR by 200 basis points to 24.75 per cent from 22.75 per cent in February; adjusted the asymmetric corridor around the MPR to +100/-300 basis points; retained the CRR of Deposit Money Banks at 45.0 per cent and raised that of Merchant Banks from 10.0 per cent to 14.0 percent and left the Liquidity Ratio unchanged at 30.0 per cent.

Naira resumes decline

However, low domestic dollar liquidity in recent weeks led to the naira falling to about N1,450/$1 and N1,500 per dollar on the official and parallel markets respectively before the MPC held its meeting last week. NBS’s latest CPI report also showed that the inflation rate climbed to 33.69 per cent in April 2024, up from 33.20 per cent in March 2024.

MPC meeting in May

The meeting saw the MPC hiking the MPR by 150 basis points to 26.25 per cent from 24.75 per cent. It however, retained the CRR of DMBs at 45 per cent and put the Asymmetric corridor around the MPR at +100 and –300 basis points. The bank also left the liquidity ratio of banks at 30 per cent. Speaking at a press conference at the end of the meeting, Cardoso said the MPC ‘s decisions were based on its belief that the CBN’s anti -inflation measures were working.

“Following an extensive review of risks and the near-term inflation outlook, the balance of risks suggest further tightening of policy to build on the benefits accrue from previous rate hikes. “In terms of looking at the inflationary figure over the past year, inflation is indeed getting more and more of an issue. And, frankly, the need to moderate that by saying that any kind of inflation in my view is an issue.”

“However, I think there is light at the end of the tunnel, and that is because as much as we see an increase in the inflationary figures when you go down to the specifics in terms of food, core and headline, you’ll see that it is moderating and decelerating in increment, and that’s the good news,” he said.

New capital base

While the CBN’s efforts to curb inflation and ensure exchange rate stability were clearly the most dominant issue since May 29, other notable developments in the financial sector in the last one year, were the regulator’s sacking, in early January, of the boards of Union Bank, Polaris Bank and Keystone Bank, on the grounds of regulatory noncompliance, corporate governance failure, among other misdeeds, as well as its release of new minimum capital requirements for the banking industry.

According to the guidelines on the new Banking Sector Recapitalisation Programme, the new minimum capital base for commercial banks with international authorisation has been reviewed upwards to N500 billion from N50 billion. Also, the new minimum capital base for commercial banks with national authorisation was raise to N200 billion, while the new requirement for those with regional authorization was increased to N50 billion. Similarly, the new minimum capital for merchant banks was raised to N50 billion, while the new requirements for non-interest banks with national and regional authorisations were increased to N20 billion and N10 billion, respectively.


But while the jury may be out as regards what were President Tinubu’s achievements in his first year in office, the consensus among industry stakeholders is that the administration, through the CBN, still has a lot of work to do in the critical area of curbing inflation and ensuring exchange rate stability.


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