Yemi Cardoso’s First Year of Bold Moves at CBN

Emmanuel Effiong

As Mr. Yemi Cardoso marks his first anniversary as the Governor of the Central Bank of Nigeria (CBN), a key question looms large: has Cardoso’s tenure so far been a success, or has it merely scratched the surface of Nigeria’s deep-rooted economic challenges?

From the outset, Cardoso faced an uphill battle. Rising inflation, a rapidly depreciating currency, a $6 billion backlog of unfulfilled commitments, diversion of remittance flows and systemic banking sector challenges all awaited his intervention. Now, a year into his leadership, we find a series of policy strides helping to resolve the earlier mentioned challenges.

Cardoso’s most visible struggle has been the battle against inflation. Under the previous leadership, the CBN went beyond its price stability mandate by directly intervening in various sectors of the economy with limited success.

From the early days of his tenure, Cardoso made price stability his foremost objective, deploying a series of interest rate hikes to rein in surging inflation, which stood at over 33.95 per cent in May 2024. In July 2024, the Monetary Policy Rate (MPR), the rate CBN lends to banks, rose to 26.75 percent, marking the fourth increase in just seven months. Critics argued that the rate hikes could stifle productive activity and burden borrowers, but Cardoso stood firm, emphasising the need to prioritise slowing down inflation.

In his opinion, inflation is a tax on the income of poor Nigerians and should be the number one priority of the CBN.  Over the past eight years, the money supply has grown in double digits despite GDP growth averaging less than two per cent over the same period.

This growth in money supply was a key factor fueling the surge in inflation. In response to this challenge, Cardoso has worked to curb the growth in money supply, and so far, it seems his efforts to contain inflation are yielding fruit. Headline inflation eased to 32.15 percent in August, the second consecutive month of decline, suggesting that Cardoso’s hawkish stance may be tempering inflationary pressures.

Another area of interest has been Nigeria’s banking sector. Exposure to volatilities in oil prices along with a depreciating currency had significantly eroded the capital base of many banks in Nigeria. With these weak buffers, their ability to finance significant ticket transactions and withstand any potential crisis in the financial market was weak.

In response to this challenge, the CBN announced a new recapitalisation program, resulting in most banks’ capital-raising exercises. When concluded, this exercise will help reposition Nigeria’s banks to provide much-needed capital to support the country’s investment needs or, as some may say, our desire to create a $1 trillion economy.

A major area of concern for many Nigerians has been the rapid depreciation of the naira over the past nine years. The naira’s decline, exacerbated by efforts to fix the rate of the naira under the previous CBN leadership, had led to a crippling of forex supply across all formal channels, along with a growing backlog of unfulfilled forex obligations.

A case in point was foreign airlines struggling to obtain forex, which led to the withdrawal of a major airline, Emirates, from providing its services in Nigeria. In addition, efforts to fix the rate amidst low supply encouraged round-tripping by those who had access to it while simultaneously depleting Nigeria’s external reserves and widening the margin between the official and parallel market rates.

Cardoso initiated a wave of reforms to restore order in response to this challenge. The naira was floated to find its true value, a bold move aimed at eliminating speculative arbitrage and narrowing the margin between official and parallel market rates. Cardoso also removed the eight-year ban on 43 items, a policy that had rendered many transactions invisible and driven importers into the parallel market.

Removing these restrictions was critical to fostering a more transparent market and alleviating demand pressure. In addition, the CBN has fulfilled all its debt obligations to businesses, and no airline has complained about its inability to source FX from the market.

Part of the reasons CBN met these obligations was the growth in FX flows due to the bank’s policies under Cardoso.

The rate hike and the move towards greater transparency in the official market resulted in significant foreign capital inflows into the country. It is estimated that close to $4 billion came into Nigeria in the first quarter of 2024, which was a 200 percent increase in flows relative to the same period in 2023. In addition, remittance flows doubled over the same period, driven by renewed attempts by the CBN to foster greater competition by permitting more IMTOs to operate, along with other steps towards enabling greater transparency and faster settlement of remittance obligations.

These steps include the willing buyer-willing seller model and the bank’s liquidity support program, which has quickly improved IMTOs’ access to naira to settle obligations to those in the Diaspora. The surge in capital and remittance flows helped to support the appreciation of the naira from N2000 in March to N1585 in August 2024.

Yet, the FX conundrum is far from resolved. Mr. Cardoso himself admitted that stabilising the naira requires efforts beyond the CBN. Factors such as the need to increase oil production, fiscal discipline, growth of non-oil exports, and more foreign direct investments are crucial factors that will shape the stability of Nigeria’s FX market and, indeed, Nigeria’s economy.

Nigerians are understandably impatient, with the cost of living and economic uncertainties weighing heavily on their daily lives. However, if Cardoso’s first year is any indication, he is a governor willing to confront hard truths and pursue difficult yet necessary reforms.

Will his efforts ultimately lead to a more stable naira, controlled inflation, and a resilient economy? Only time will tell, but Cardoso’s tenure so far reflects a central bank governor striving to restore order in an economy beset by headwinds.

•Effiong is a senior policy analyst based in Abuja.