Market News

By : COLLINS OLAYINKA

The global economy has weathered significant storms over the few two years. For Nigerian economic managers, the reform in the financial sector has positioned the country to build stronger buffers to weather the storm and subsequent ones, as attested to in Fitch Ratings’ positive assessment of the economic reforms and economy. COLLINS OLAYINKA reports.

In the past two years, the financial system has undergone significant reforms – foreign exchange (FX) liberalisation, recalibration of FX trading platforms to increase transparency level, revert to orthodox monetary policy and bank recapitalisation of the banking sector.

Fitch Ratings scored the economy high on the policies based on the reforms, which the economic managers highlighted at the just-concluded International Monetary Fund (IMF) and World Bank Group Spring Meetings.

The Governor of the Central Bank of Nigeria (CBN), Olayemi Cardoso, outlined the gains of the financial reforms on businesses and the economy, noting that in the face of temporary pains, they have started bearing positive results. He pointed to Cardoso at stability in exchange rate, stronger economic buffers, stable prices, increased foreign investors’ participation and improved sovereign rating as evidence of the early success story.

The impact of orthodox monetary policy adoption and reforms on the exchange rate has continued to reverberate across key sectors of the economy, said Cordoso, who noted that the reforms would be sustained because they have helped the economy to navigate difficult paths.

Considering these global challenges, he added, it is imperative to sustain and enhance reforms to strengthen economic buffers to withstand external shocks. For him, this requires a steadfast focus on curbing inflation, ensuring fiscal discipline and advancing initiatives that promote greater economic diversification.

Before the reform, inflation had surged to 27 per cent and had become a major challenge. Inflation was driven by excessive money supply growth. While the GDP growth had stagnated at around 1.8 per cent over the previous eight years, money supply expanded rapidly, averaging about 13 per cent growth yearly. Much of the money supply was created by the apex bank through excessive ways and means (W&M) financing, which grew to over N30 trillion before the monetary put restraints.

The windfall of unproductive financial injection, reports said, fueled inflation as well as contributed to a significant depreciation of the naira. High inflation created uncertainty for households and businesses, acting as a silent tax on purchasing power and driving up living costs.

But the IMF, in its Article IV report, said the stoppage of the overdraft had restored some fiscal discipline to the mix and that it counted for the country’s improved confidence level.

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. It also rejigged the policy environment to eliminate FX rigidities and increase inflow into the system. The rise in interest rates also opened the Nigerian market for foreign fund managers.

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 FX rates, which had encouraged arbitrage opportunities. The regime stifled the much-needed foreign investment and led to the depletion of our external reserves, which fell to $33.22 billion in December 2023, even as the cost of the FX subsidy regime was estimated to exceed that of fuel subsidies.

The authorities have undertaken critical reforms to unify Nigeria’s exchange rate, eliminate distortions and restore 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 the developments came positive Fitch Ratings on Nigeria’s economy, signalling a positive fallout from the reforms. The global rating agency said that from exchange rate unification to reduce arbitrage in the markets, introduction of an 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 CBN has demonstrated commitment to achieving sustainable economy growth and exchange rate stability.

In the past two weeks, Cardoso has engaged key stakeholders and investors on the significance of the bold reforms and what they mean for the economy while assuring that Nigeria is fully ready to attract and sustain new businesses. Though redeeming the fortunes of the Nigerian economy fully rests on the shoulders of the domestic players, securing global partnerships, collaboration, and other deals has become critical in charting a path for sustainable growth.

Cardoso also harped on market stability. Since assuming office in October 2023, Cardoso has not minced words that returning the apex bank to its original orthodox duties would not only restore the much-needed strong monetary regulation but would offer clarity of its roles within the Nigerian economic framework.

It was clear to him that mixed signals are destructive and bad for an economy in dire need of stronger market confidence as well as global collaboration.

In February, the apex bank retained its benchmark lending rate at 27.50 per cent, marking the first time it has opted to maintain the rate in almost three years.

The Monetary Policy Committee (MPC) of the bank stated that its unanimous decision was influenced by recent macroeconomic developments, which it noted with satisfaction.

These include stability in the foreign exchange market, leading to an appreciation of the exchange rate, and the gradual moderation in petrol prices, both of which are expected to positively impact price dynamics in the near to medium term.

The benchmark rate is the standard interest rate set by central banks, used to guide lending rates and influence economic activities, inflation, and financial stability. The central bank also retained the asymmetric corridor around the MPR at +500 to -100 basis points.

Cardoso said the committee voted to retain the Cash Reserve Ratio (CRR) at 50 per cent for commercial banks while maintaining the CRR of merchant banks at 16 per cent. The committee also voted to retain the liquidity ratio at 30 per cent. The CBN has continued tightening monetary policy to curb inflation, implementing a series of interest rate hikes throughout 2024. These decisions were aimed at stabilising the economy amid persistent price pressures.

In 2024, the bank raised rates six times, delivering a cumulative increase of 875 basis points. “The committee highlighted the benefits of the improvements in the external sector to exchange rate stability, including the convergence of rates between the Nigerian foreign exchange market and the Bureau to change and urge the bank to relent, not to relent in its effort to boost market liquidity,” Cardoso said.

Fitch expects the macroeconomic policy stance to support the move to lower inflation and sustain improvements in the foreign exchange (FX) market’s operation, though it will likely remain much higher than rating peers.

It also expects “a continued reduction in external vulnerabilities through the further easing of domestic FC supply constraints, while renewed energy sector reforms should help sustain current account surpluses”.

It added: “Greater formalisation of FX activity including the Central Bank of Nigeria’s (CBN) recent introduction of an electronic FX matching platform and a new FX code to enhance transparency and efficiency, along with monetary policy tightening, has led to a greater rise in FX liquidity and general stability in the FX market after a 40% depreciation in 2024, closing the spread between the official and parallel exchange rates.

“Net official FX inflows through the CBN and autonomous sources rose by about 89% in 4Q24, compared to an 8% rise in 4Q23. We expect continued formalisation of FX activity to support the exchange rate, although we anticipate modest depreciation in the short term.

“The CBN has tightened monetary conditions through a combination of policy rate hikes to 27.5% (up 875bp since February 2024) and use of prudential and operational tools such as open market operations (at rates closely aligned to the MPR) to strengthen monetary policy transmission after years of financial repression.”

Reacting to the Fitch rating, Oladele Adeoye, Chief Rating Officer at DataPro, a Nigerian credit rating agency, said it was a positive development “in all ways”. Adeoye said it would boost investors’ confidence in Nigeria’s Eurobond as people would readily subscribe whenever it is issued.

“Good rating also implies lower cost of funds. Of course, there will be an inflow of foreign currency into the economy, and this will give further room for the CBN to support the local currency and strengthen the exchange rate,” he said.

On how the government can improve on this, Adeoye said: “Nigeria must increase productivity that can boost exports and lower imports. This will enhance the external reserve and improve public finance.

“We need to continue to improve our revenue base, and this includes both oil and non-oil revenue.”

Registrar/Chief Executive Officer, Nigeria Institute of Credit Administration (NICA) Chartered, Prof. Chris Onalo, said the national body for credit management said the Fitch rating “means a lot.”

He said he could not agree less with the agency’s rating. “It is solid, it is stable, it is progressing, and it has a future outlook,” Onalo said.

On further steps the government can take on the economy, he said: “The government should focus on expanding the economy. In other words, all-inclusive economic activities.

“The government should fix the infrastructural problem because that will stimulate future ratings.

“It should also reduce the cost of doing business drastically. And then fix electricity and clamp down on the local insecurity, like the insurgency is becoming a thing of the past now, but pocket pickers, people that break into offices, and you can arrest that by creating avenues for jobs, wider job availability for people that are regarded as forgotten miscreants.