fx-reforms
Dec 10, 2024
Assessing CBN’s economic policies powering naira’s rebound
Source: The Nation

Over the past year, the Central Bank of Nigeria (CBN) has undertaken critical reforms to unify Nigeria’s exchange rate, eliminating distortions and restoring transparency.
This unification has enabled the apex bank to clear the outstanding foreign exchange obligations, giving businesses—ranging from manufacturers to airlines—the confidence to plan and invest in the future.
One of the gains of this exercise include the ongoing rally of the naira at both official and parallel markets. It is culmination of several months of innovative policies initiated by the Olayemi Cardoso-led CBN.
The naira broke key resistance levels at the Nigerian Autonomous Foreign Exchange Market as the Central Bank of Nigeria (CBN) began the implementation of the new Electronic Foreign Exchange Matching System (EFEMS) on December 2.
The platform, addresses long-standing issues of market opacity and inefficiency by facilitating smooth trading and consistency among participants.
In the currency market, the naira appreciated against the dollar across all segments. More specifically, at the parallel market, the local currency exchanged at N1,530/$ while it exchanged at N1,535/$ the Nigerian Foreign Exchange Market Window (NAFEM).
Cardoso had at the 2024 Chartered Institute of Bankers of Nigeria (CIBN) dinner held November 29 in Lagos, expressed strong optimism that measures being deployed by his administration will deliver benefits that would be felt by every Nigerian in no distant time.
He said the need for reassurance on the expected outcomes from policy measures being deployed by the CBN was necessitated by the growing pains of Nigerians due to the further deterioration of key macroeconomic variables (notably, inflation and exchange rate) that are within the purview of the monetary policy authority relative to when he assumed office last year September.
Cardoso over time, prioritized stabilising the exchange rate, curbing inflation, strengthening banks’ capital buffers, and fostering an environment conducive to the success of both businesses and individuals.
To drive these objectives, the Cardoso-led CBN administration has in the past year rolled out several measures.
Specifically, the CBN’s tightening liquidity conditions to curb inflation by raising benchmark interest rate -Monetary Policy Rate (MPR) and Cash Reserve Ratio (CRR) by 850 basis points (bps) and 12.5 percentage points (ppts) to 27.5 per cent and 45 per cent respectively, and lowering Loan to Deposit Ratio (LDR) by 15.0ppts to 50 per cent created significant mileage that ignited the ongoing naira rally.
This was followed by the apex bank’s pegging of the initial FX cash pulling for International Oil Companies (IOCs) at 50 per cent of available proceeds, while the remaining cash balance is only accessible after 90 days.
The apex bank’s approved expenditure plans for the IOCs include settlement of Petroleum Profit Tax, royalty, domestic contractor invoices, cash call and domestic loan principal and interest payment. Other approved expenditure plans include transaction taxes- including Nigeria Content Development levy, education tax and forex sales at the Nigerian Foreign Exchange Market.
The apex bank also rightsized the number of BDC operators to enhance regulation and re-commence periodic FX sales to them at a discounted rate.
The CBN’s policy that limited PTA and BTA settlement to electronic channels to prevent roundtripping was also a masterstroke that supported the naira rally. Before now, many FX sold the travelers were in most cases, diverted to other uses.
Besides, the CBN under Cardoso also initiated banking industry recapitalisation to strengthen capital buffers for banks and redefined Net Open Position ceiling for banks (25 per cent short and zero per cent long on foreign currency) to unlock FX liquidity.
On recapitalization of banks, Cardoso said: “This strategic move ensures that banks are well-capitalized, enabling them to take on greater risks, particularly in underserved markets. With stronger capital bases, banks can provide more loans and financial products to Micro Small and Medium Enterprises (MSMEs), rural communities, and other vulnerable segments that have previously struggled to access formal financial services”.
Cardoso said the recapitalisation policy not only strengthens financial stability but also serves as a catalyst for inclusive growth.
“By enabling banks to extend more credit to MSMEs, we enhance job creation and productivity. Furthermore, with increased capital, banks can invest in technology and innovation, crucial for driving digital financial services such as mobile money and agent banking. These technologies are key to breaking down geographic and economic barriers, bringing financial services to even the most remote areas,” he added.
Views from other stakeholders
Analysts at Commercio Partners said Nigeria's financial landscape has seen significant developments with the CBN introducing revised guidelines to enhance transparency and governance in the foreign exchange market.
These guidelines emphasize ethical practices, real-time reporting, and regulated interbank trading while mandating compliance from banks, dealers, and BDC operators. Separately, the naira has appreciated steadily, supported by increased dollar inflows and the launch of the EFEMS, which has boosted market confidence by facilitating transparent and efficient FX transactions.
Managing Director, Afrinvest West Africa Limited, Ike Chioke said the recovery could be attributed to improved market confidence following the successful launch of the EFEMS designed to promote trading transparency.
“Also, the liquidity supply boost provided by Nigeria's successful pricing of $2.2 billion in Eurobonds earlier last week significantly boosted the exchange rate position against the dollar. We anticipate the Naira to regain more ground against the dollar this week, driven by aforementioned factors,” he said.
Chioke, listed other key policies of the apex bank that supported naira rally as the clearance of the $7 billion FX backlog and resumed sales of Open Market Operation (OMO) bills to Foreign Portfolio Investors (FPIs) at market reflective rates.
He said: “Besides, the CBN Removed limits on rates quoted by International Money Transfer Operators (IMTOs) to incentives using the official channel for FX settlement. Eliminated the N2 billion ceiling on allowable interest-bearing deposits by DMBs at the Standing Deposit Facility (SDF) window. The apex bank also committed the Nigeria National Petroleum Corporation Limited (NNPCL) to domicile a significant portion of revenue flows and other banking services with the CBN to enhance reserves accretion”.
Michael Adigun, a Lagos-based, entrepreneur, said that the stability in exchange rate has already started to have positive impact on the prices of goods and services. “For instance the price for international school fees has dropped by 10 per cent; cost of medical tourism reduced by 15 per cent and prices of air fares for local and international trips dipped by 15 per cent”.
Another Abuja-based civil servant, Stevens Okoye said: “The current developments in the foreign exchange market has started reigning in inflation as prices of most necessities are becoming relatively lower in the market.”
“In a most serious note, the positive impacts include also heighten confidence of the public in the local currency as it eliminates currency substitution behavior which hitherto being adding pressure on our local currency”.
Okoye said what is needed is to continually support the CBN policies, to further attract more benefits to businesses and economy.
Also, the easing of capital control measures, including the timely facilitation of over $9 billion principal capital & dividend outflows by qualified investors, and the reversal of the 2016 ban on access to FX in the official market for importers of 43 essential items headlined the multiple steps taken thus far by the CBN to restore foreign investor confidence and foster an environment conducive for businesses to thrive.
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