Can CBN Governor, Cardoso, Bring Liquidity, Stability to Forex Market?

Obinna Chima

The Nigerian economy is at a crossroads with the option to either swim or sink. This dire strait was brought about by the precipitous depreciation of the Naira against the United States’ dollar in the past few weeks which has remained a source of concern to business operators and the citizens.

The free fall of the naira, which last week became a topical issue as the official foreign exchange (FX) rate fell below the parallel market FX rate, further shook public confidence as businesses and investors continue to find it difficult to predict the naira exchange rate.  Precisely, during the week, the Naira fell to N1,482/$1 on the official and around N1500/$ on the parallel market rate, which necessitated a raft of measures introduced by the Central Bank of Nigeria (CBN) to calm the market.

In response, the CBN has in the past few weeks taken steps to calm the market, especially by clearing the country’s FX liabilities across various sectors, which was estimated at about $7 billion, with about $2.4 billion discovered to have infractions.

Additionally, the central bank last week directed banks to ensure that the Net Open Position (NOP) limit of their overall foreign currency assets and liabilities on-and-off-balance sheet does not exceed 20 per cent short or zero per cent long of shareholders’ funds unimpaired by losses using the gross aggregate method, a move which was expected to in the short-to-medium term boost dollar liquidity in the financial system.

Furthermore, the apex bank announced the removal of allowable limit of exchange rate quoted by the International Money Transfer Operators (IMTOs). It pointed out that IMTOs are now allowed to quote exchange rates for Naira pay-out to beneficiaries based on the prevailing market rates at the Nigerian foreign exchange market on a willing seller, willing buyer basis, thus abolishing -2.5 per cent to +2.5 per cent allowable cap around the previous day’s closing rate.

To most financial market experts, the lacklustre performance displayed by the Naira reflects the symptom of broader economic problems such as the import-oriented structure of the economy, continued inflationary pressure, fiscal imbalance, among others.

Inflation in Nigeria closed 2023 at a 21-year high of 28.92 per cent, the National Bureau of Statistics disclosed recently. The rising inflation has also contributed to the depreciation of the Naira as it has raised the cost of imports, which feeds into higher consumer prices.

Also, the free fall of the Naira has been partly attributed to excess cash in the system, which some specifically accused the state governors of using to mop up dollars, thereby putting pressure on the FX market.

“What we are seeing in the market is partly as a result of some state governors and the sub-who have lots of cash and because most of them have not activated the payment of palliatives in their states, they are indulging in reckless spending and those monies they are spending are being used to chase dollars, therefore putting pressure on the FX market,” argued a top market analyst who pleaded to remain anonymous.

Notwithstanding other external factors plaguing the nation’s currency, the country’s heavy import dependence is also responsible for the high forex outflow and the perennial weakness suffered by the Naira. According to analysts, the country’s high import dependence explained why the exchange rate is often the bellwether for Nigeria’s economic health, and why there is a swift pass-through of exchange rate movements to inflation. More than a third of Nigeria’s FX outflows are due to invisibles. Also, the country’s infrastructure deficit explained the huge level of importation of processed and final goods.

It was also gathered that the free fall of the naira which has resulted to a hike in import duty, has also caused an escalation in the cost of petrol subsidy as the federal government may be subsidising petrol at about N670 per litre presently.

The economy badly needs dollar liquidity and all eyes are on the CBN Governor, Yemi Cardoso for monetary policies that would help unlock the desired dollar inflows.

But speaking in an interview with Arise News Channel yesterday, Cardoso pointed out that the economy had been in a situation in recent past where there has been a shortage of liquidity in the FX market, arising from “certain distortions,” which created huge volatility in the market.

He, however, is optimistic that with ongoing reforms, “ultimately, we see a situation where people who require FX don’t have to know anybody in the banks, that is, either the CBN or the commercial banks. A system that is open and transparent creates an environment for distortions to go away and those who want to bring in FX and those who want to demand for it can do so on an open basis, willing buyer, willing seller basis and therefore the market becomes active and price is eventually discovered at a level that makes sense.”

According to Cardoso, the new policy on banks’ Net Open Position on the foreign currency as well as the new circular on the IMTOs would help boost FX liquidity in the market.

“It is also important to say that in all these, we believe that the market must be very transparent. The rates must be out there and everybody must know the rules of the game. That way, people don’t get caught unaware. I think that is another critical message that we are sending out to the market.

“In our role as regulators, we are significantly improving and taking up surveillance activities to ensure that the market works the way it is supposed to work and that all the players play by the rules and there is hardly rule for infractions. Those may seem basic, but they are fundamental to the proper functioning of any long-term FX market,” Cardoso added.

He stressed that, “the monetary side cannot do it alone. Both the monetary and the fiscal side must collaborate and both must understand what each other is doing and how they inter-relate. The different stakeholders understand that collaboration is key and it is way beyond just talking.

“We would focus our efforts at doing what central banks are supposed to do, which is controlling inflation, stabilise prices and ensure that we have a stable environment.”

To the Head, Wealth Management Nigeria, Standard Chartered Bank, Lanre Olajide, the challenge in the FX market is primarily and issue of demand and supply.

He noted that the demand for dollar in the economy is incredible.

“We are an import-dependent nation and we import almost everything. If you have an economy that runs that way, then your supply must also go up. But there is a deficit in supply.

“So, the first thing we need to do is to reduce our appetite for importation. We absolutely need to export more to generate more FX so that we can take care of the supply side and I think that is where ramping up oil production comes from, to help with FX receipts.

“The Dangote Refinery is a right step in the right direction and as it continues to increase, it will contribute its own quota.”

In his contribution, an Associate Director at Agusto Consulting, Mr. Jimi Ogbobine, advised the CBN under Cardoso to take steps to save the currency.

Ogbobine explained that at the end of the tenure of President Muhammadu Buhari, the parallel and official FX markets had 50 per cent differentials, which created gap for arbitrage.

“At same time, if you look at the other side, not much people were willing to invest in treasury bills because the yields were low and there was no incentive to invest in treasury bills. So, you will agree with me that the monies that ought to be invested in treasury bills are what everybody is trying to use to buy dollars.

“So, when President Bola Tinubu harmonised the FX market, the CBN was supposed to have done two things: They were supposed to have devalued the official market such that it would be at par with the parallel market and they were supposed to stop rigging interest rate on treasury bills.

“Treasury bills rates are supposed to be market-determined, but the CBN started slamming banks with arbitrary Cash Reserve Requirement (CRR) and forcing the banks to invest in treasury bills. The market rate didn’t matter to the CBN anymore. So, there was no incentive holding naira, which is why we see everyone chasing dollars, thereby ramping up demand for the dollar,” he explained.

In order to stabilise the FX market, Ogbobine advised the CBN to take steps to ramp up dollar supply. He recommended that Nigeria’s should approach the International Monetary Fund (IMF), World Bank for support.

“We have already taken the bitter bill, which is devaluation and so let’s take the sweetener from them which is the FX. The IMF support would send confidence signal to investors that we are back to business. So, if we are able to unlock IMF funding, we would be able to attract foreign investments,” he added.

For his part, the Managing Director/Chief Business Officer, Optimus by Afrinvest, Mr. Ayodeji Ebo, also stressed the need for the country to take steps to increase dollar supply.

“A massive problem has been created in the FX market and it requires drastic measures. It might look expensive now, but if they are able to raise about $10 billion, clear the backlog and increase FX supply, and within the next six months or one year, we would begin to see foreign portfolio investors and foreign direct investments come in.

“Most of our external reserves are encumbered, so we need fresh money. Also, the security agencies must address oil theft so that we can raise our crude oil production to about 1.65 million barrels per day. That is what will show sincerity. The major steady source of FX has been crude oil sales. That is why we need to significantly reduce crude oil theft and increase supply,” Ayodeji explained.

To the immediate past Director General, West African Institute for financial and Economic Management (WAIFEM), Prof. Akpan Ekpo, it was wrong for Tinubu to have harmonised the FX markets.

“The FX market is not a competitive market. The supply of FX in US dollar, Euro and pound sterling (including the market of access) is never enough to meet the demand. The supply curve of forex is not a well-behaved one.

“The main source of forex supply is through the export of crude petroleum whose revenue is used to import refined products and makes no sense. Our economy is both not developed and industrialised hence FX is not earned through the manufacturing and exporting non-oil goods and services.

“For now, the appropriate exchange rate regime should be a managed float with emphasis on managed. The regulatory authority must watch both the supply and demand side of the forex market and make adjustments accordingly. Opening the forex market would result in distortions and shocks which the economy cannot absorb,” Ekpo, who is a former member of the Board of the CBN said.

Furthermore, he noted that the present economic crisis requires the ‘visible hand’ of government to restore recovery.

“The economy is sinking and reliance on the private sector and market forces would further deepen the crisis. There are forces more powerful than the market, for example, the World Bank and the IMF with their one-size fits all approach. Sometimes, the market has to be created but for now it could be used as an instrument.

“The economic philosophy that can ensure urgent recovery is that of a developmental state economic blueprint which implies the visible hand of government in economic activities. A visionary and transformative leader must give the people hope,” he added.

From the foregoing, the dominant problem facing the FX market is dollar scarcity and the central bank must do all within its reach to improve the supply of the greenback. Furthermore, it must urgently design policies to incentivise dollar holders so that the several billions of FX sitting idle in bank customers’ domiciliary accounts must be brought out.

In addition, the fiscal authorities must increase the country’s ability to export non-oil goods and services so as to boost FX inflows. It is important to point out that that the central bank cannot abandon the FX market completely to the forces of demand and supply. It must stand ready to intervene whenever it deems it necessary for market correction as the Nigerian economy has not matured to the state where the FX market would be left completely to the forces of demand and supply. Also, the security agencies must also work harder to significantly reduce crude oil theft so as to further boost the country’s dollar earnings.