CBN Successfully Subdues Attack On Naira, Makes Room For Economic Growth

The Central Bank of Nigeria (CBN) appeared to have finally subdued arguably one of the most gruelling and the multi-faceted attacks on the Naira in recent times.

This is just as data compiled by THISDAY on the daily turnover on the official Nigerian Autonomous Foreign Exchange (NAFEM) between January 18 and April 18, 2024, revealed the market has recorded total turnover of $12.66 billion over three months.

The trend in the daily turnover data showed fluctuations in value, with some days recording relatively low turnovers and others recording higher amounts.

But findings showed that in February, there was a significant increase in turnover, with some days experiencing exceptionally high turnovers, particularly towards the end of the month.

Following a bouquet of reforms launched by the apex bank to sanitise the foreign exchange (FX) market at the inception of President Bola Tinubu’s administration, the local currency had received direct hits from attackers who were mostly currency speculators.

The official exchange rate of the Naira to a dollar stood at about N465.07/$ at the time Tinubu took over the helm of affairs in June last year, promising to achieve a unified exchange rate in contrast to the multiple exchange system, which he had inherited.

The president, who had blamed the country’s economic woes and currency challenges on faulty policies of the central bank, immediately approved new measures aimed at stabilising the FX segment.

One of the major reforms introduced by the apex bank was the floating of the Naira, which immediately opened up a floodgate of vulnerabilities against the local currency.

Before the eventual liberalisation of the FX market, the past leadership of the central bank had been under severe pressure to float the local currency and allow it to find its real value. But the central bank, rather chose to adopt a managed-float regime, intervening in the market whenever the situation demanded.

The reluctance of the apex bank to float the currency was largely because the country remained heavily import -reliant and given that the move would create a likely liquidity crisis.

However, following the liberalisation of the exchange rate market, where forces of demand and supply determined the value of the currency, and amidst a series of devaluations, the Naira shed significant value.

As of June 21, 2023, the local currency had lost 38.7 percent to trade at N763/$ on the official window– at par with the parallel market rate.

Among other things, the resulting confidence crisis as a result of a backlog of unsettled FX liabilities amid the expected liquidity challenges also limited the local currency’s chances of survival.

As of February this year, the Naira depreciated to about N1,800 to the dollar on the parallel FX market as its woes continued, amid a high inflationary environment and attendant impact on prices of goods and services.

At some point, analysts had called for the reverse of monetary policies to address the economic hardship resulting from the policy choices.

However, the CBN apparently achieved a breakthrough when it started to clear genuine FX backlogs, initially estimated at about N7 billion but reduced to about $4.5 billion as over $2 billion requests turned out to be fraudulent. It also commenced the sale of the greenback to Bureau De Change operators who hitherto were banned as well as lifted ban on 43 items that were prohibited from accessing FX from the official market.

The settlement of the outstanding FX indebtedness boosted confidence of local and international investors, particularly portfolio investors who had since injected significant liquidity in the market to help strengthen the ailing Naira.

The local currency has since returned to winning ways and currently trades at about N1,100/$, with the Naira’s positive performance expected to have salutary effects on the economy.

Only recently, Goldman Sachs, in a report, predicted Nigeria to rank as the world’s 5th largest economy by 2075. The report had also projected the country to emerge as the world’s 15th largest economy by 2050.

The top global investment banker had further predicted the country’s GDP to reach $13.1 trillion by 2075, further solidifying its position as Africa’s largest economy.

The projection puts Nigeria ahead of Pakistan at 6th position, Egypt (7th), Brazil (8th), Germany (9th), UK (10th) Mexico (11th), Japan (12th), Russia (13th), Philippines (14th), and France (15th).

Analysts believed the feat was achieved through liquidity boosts and the aggressive monetary tightening regime implemented by the CBN Governor, Mr. Olayemi Cardoso, who have raised the Monetary Policy rate (MPR) by 600 basis points since assumption of office in a bid to achieve price stability.

The Naira’s major comeback has continued to attract accolades from analysts who have hailed the recent monetary policy direction of the apex bank.

But they have also expressed concerns that the present gains may become unsustainable in the long-run without a commensurate policy action by the fiscal authority.

Analysts who spoke with THISDAY emphasised the critical need to boost oil output, which has been dwindling, and underscored the significance of diversifying the economy and stimulating non-oil exports to enhance foreign exchange earnings.

They also hoped that the recent interest rate hike and current banking industry recapitalisation drive could further attract foreign exchange inflows.

Group Chief Executive Officer, Cowry Asset Management, Johnson Chukwu, emphasised the need to improve oil production to sustain the Naira’s current gains.

He told THISDAY that, “It is going to be tough one to sustain the current gains we have in Naira without improving oil production. The gains we have in Naira are driven by withdrawals from the central bank and DMO who have collectively withdrawn about N12.7 trillion and in addition, you have foreign portfolio investors who are enjoying the benefits coming in at low exchange rates and high interest rates.

“So, these are not sustainable measures. What is sustainable that will make the naira remain strong or improve further will be if we have improved our operating cash flow or operating foreign currency cash flow. And current cashflow for Nigeria for now remains oil production.”

He said, “We have witnessed a consistent decline in oil production in the past three months from a high of 1.64 million barrels per day in January to about 1.4 million barrels in march.

“The assured route to having stability in the naira will be to have significant improvement in oil production otherwise it would be difficult to sustain.”

On his part, the Head of Financial Institutions Ratings at Agusto & Co, Mr. Ayokunle Olubunmi, also harped on the need to diversify the economy, and bolster foreign exchange (FX) earnings.

He said, “The moves now for the CBN to handle the gains in the exchange rate. We have seen them raising the rates, settling the outstanding obligation actively engaging the international investment community to improve their confidence in Nigeria.

“All those are good, But the truth is that if we are going to maintain this appreciation, in summary, what we need to do is to increase our FX earnings and a bulk has to do on the fiscal side.

“What we have seen thus far that has helped us is actually foreign portfolio investments, and those are short-term funds, the next year they may take their funds out.

“So, things that can promote export, improve our non-oil exports because oil sentiment is going down and in the long-term, non-oil export would be critical while also looking at our oil export because that is the low hanging fruit.”

Olubunmi said, “As a country, we have a lot of non-oil exports that we can export out. Also, trying to reduce the bureaucracy and the challenge of exporting goods would help. Also, there should be reforms at the ports to enhance exports.

“Also, there is a need to increase the consumer purchasing power of Nigeria because when the economy is booming, that is when you’ll see those foreign direct investors start coming into the country.

He said the planned bank recapitalisation exercise would attract foreign investors and further support the Naira’s appreciation.

According to him, “The amounts that the banks need to recapitalise. The expectation is that a lot of them will also reach out to foreign investors. And with GT bank saying the amount that it wants to raise is denominated in dollars. So now we also, in the medium term, support the naira appreciation because more funds would come in based on the recapitalisation process.”

On his part, Head, Global Markets, Parthian Partners, Ronke Akinyemi, acknowledged the positive impact of recent monetary policies on the Naira.

She also emphasised the importance of encouraging exports, and managing imports effectively, as well as enhancing trade balance to ensure long-term currency stability.

She said, “The recent strengthening of the Naira is a positive development, although the anticipated reduction in prices has been slower than expected. The Central Bank of Nigeria (CBN) has played a vital role in managing the Naira’s value through foreign reserve management, interest rate adjustments, and various policy reforms.

“To further bolster the Naira, it is imperative to encourage exports, manage imports effectively, and enhance our trade balance. This will contribute to currency stability in the long term.

“Additionally, ensuring stability and instilling confidence in the financial market can be achieved through strengthening regulatory frameworks and enhancing transparency. The recent announcement of bank recapitalisation by the CBN, scheduled for 2026, is a step in the right direction.

 “Another essential aspect is improving government spending efficiency and refining taxation policies, which will help sustain the Naira’s strength.”

James Emejo and Nume Ekeghe

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