As Cardoso Tweaks FX Market Policy to Halt Naira Collapse

Last week’s unveiling of a set of policy decisions aimed at stabilising the nation’s foreign exchange market, boosting the overall performance of the Central Bank of Nigeria, and giving a fillip to the ongoing economic reforms of President Bola Tinubu may eventually redeem the image of the bank under the new management, if the policies are followed through, writes Festus Akanbi

In furtherance of his reform agenda, which he referenced during his screening by the Senate last month, the Central Bank Governor, Mr. Olayemi Cardoso last week released some policy decisions aimed at halting the spike in the rate of dollars and the attendant free fall of the naira.

High points of the new policy shift include the resolve of the new management of the apex bank to boost liquidity in the foreign exchange (FX) market by intervening “from time to time”. The bank, in a statement issued on Thursday, said that as market liquidity improves, the interventions will “gradually decrease.”

Other policy measures included the lifting of the ban on 43 items previously restricted from accessing forex and the declaration that the apex bank would no longer be directly involved in development finance interventions.

In 2015, the CBN restricted 43 items from accessing FX from the I&E window. Some of the affected items include rice, cement, margarine, palm kernel, palm oil products, vegetable oils, meat and processed meat products, vegetables, and processed vegetable products, poultry, tomatoes/tomato paste, soap, cosmetics, wheelbarrows, cold rolled steel sheets and head pans.

The lifting of the ban means that importers of these items can now freely purchase forex from the official window at ‘cheaper rates’.

There have been calls from different quarters for the removal of the ban on these items right before the advent of the current administration. In what looks like a coincidence, Citigroup, where Cardoso presided as chairman, recently joined the call for the lifting of the ban on 43 items previously restricted from the official fx window. Citigroup alluded to a report that said that the restrictions placed on foreign exchange provisions for 43 items must go if the country was to fix challenges plaguing the forex market. This was revealed in the CEEMEA Frontier Credit Market Commentary written by credit analyst, Ayso van Eysinga, following a trip to Nigeria. In his notes, Van Eysinga said that apart from clearing the backlog of forex demand, there was a need to remove restrictions from the 43 items.

The report stated that unless the backlog is cleared, local banks will be under a heavy burden and the capacity of corporates to get letters of credit will be severely hampered.

Policy Normalisation Process

The CBN’s action, according to the Founder and Chief Executive Officer of the Centre for the Promotion of Private Enterprise (CPPE), Dr. Muda Yusuff should be seen as part of the policy normalisation process.

Yusuf, who spoke with our correspondent on Thursday described the exclusion of the 43 items as one of the several drivers of distortions in the forex market, saying the exclusion of the items also contributed to the persistent divergence in rates between the official window and the parallel market. 

“The exclusion also conflicted with extant trade policy as the items were not under import prohibition in the first place.   It was an example of a lack of policy coordination under the previous administration,” he said. 

CPPE boss believed that the new directive would also improve transparency and disclosures in foreign exchange transactions.  

He, however, stressed the need for the CBN to avoid market suppression tendencies, especially outside the I&E window, adding that all policy impediments to forex inflows should be removed. 

Yusuf, who was also a former director general of the Lagos Chamber of Commerce and Industry, said the fiscal authorities should continually monitor the economic landscape to shape the character of fiscal policy measures to regulate imports in line with comparative advantage principles.  “We need to worry about the risk of an import surge. There is also a need to upscale the use of fiscal policy measures to boost domestic production and productivity,” he said.

On his part, the founder of Stanbic IBTC Bank Plc and Anap Foundation, Atedo Peterside,  said the CBN made the right move to lift the ban on the 43 items initially restricted from accessing foreign exchange (FX).

Reacting to the development in an X post, Peterside said the financial regulator made the right call to discourage the use of FX policy as a determinant of profitability for importers.

“Attacking a problem at the source: CBN is right (See Circular) to discourage the use of FX policy as a determinant of which importer achieves what margin of profitability. That is the role of levies and tariffs,” the post reads.

“FX market exclusions only fuel the parallel market and widen arbitrage.”

Reform in CBN

To keen watchers of the nation’s finance sector, the chain of events in the CBN in recent times would not come as a surprise given the declaration of President Bola Tinubu to reform the bank to make it more productive and effective in its duty. The decision came amid high levels of volatility experienced in the FX market following the unification of all trading windows into the investors’ and exporters’ (I&E) window – the official FX market.

For instance, on Wednesday, the naira fell to a new all-time low, trading at N1,045 to the dollar in the street markets. The depreciation was sustained at the official market at N776.

In what has been described as a fulfillment of its promise, the regulator pledged to continue to promote orderliness and professional conduct by all participants in the foreign exchange market to ensure market forces determine exchange rates on a willing buyer, willing seller principle. To promote transparency and uniformity, the CBN reiterates that the prevailing Foreign Exchange (FX) rates should be referenced from platforms such as the CBN website, FMDQ, and other recognised or appointed trading systems to promote price discovery, transparency, and credibility in the FX rates.

Focus on Core Mandate

The CBN governor has also been quoted as saying that “much has been made of past CBN forays into development financing, such that the lines between monetary policy and fiscal intervention have blurred. “In refocusing the CBN to its core mandate, there is a need to pull the CBN back from direct development finance interventions into more limited advisory roles that support economic growth.”

The CBN has been involved in providing funding for various developmental projects. This has led to a blurred line between the CBN’s role in monetary policy and its intervention in fiscal matters.

“However, there is a growing recognition of the need to refocus the CBN to its core mandate and limit its involvement in direct development finance interventions,” he was quoted as saying.

Not ruling out advisory roles, Cardoso was also quoted as saying that “one approach is to transition the CBN from directly providing financing for development projects to a more limited advisory role. Instead of directly funding projects, the CBN can provide guidance and expertise to help facilitate economic growth.

“This advisory role can include providing recommendations on policy measures, regulations, and strategies that support economic development.

“By limiting its direct intervention in development financing, the CBN can avoid potential conflicts between its role in monetary policy and its involvement in fiscal matters. This separation will allow the CBN to focus on its primary mandate of maintaining price stability, promoting financial stability, and ensuring the soundness of the banking system.”

As Nigerians await the transmission of the new policies into the economy, all eyes will be on the apex bank to wriggle the economy from its current sorry state. It is definitely when this is done that Nigerians can breathe fresh air.