Naira appreciation and calls for CBN to sustain monetary policies

In recent times, the Naira, Nigeria’s legal tender, appears to be getting stronger after an all-time low of N1,900 in exchange for the dollar in February.

The currency started its gradual appreciation in March, peaking at N1,230 at the parallel market in the first week of April.

Trouble had started for the naira when President Bola Tinubu, shortly after assuming office on May 29, announced his administration’s decision to float the currency.

Tinubu’s plan was contained in a comprehensive monetary policy reform meant to ensure a single exchange rate for the naira.

The Central Bank of Nigeria (CBN), afterwards, adopted a clean float foreign exchange management policy and announced immediate changes to operations in the Nigerian foreign exchange (FX) market.

As part of its policies to ensure economic recovery, the CBN announced the unification of all segments of the FX market.

Previously, there were foreign exchange rates for different purposes, such as medical tourism and studies, pilgrimages, the parallel market, and CBN, among others.

The FX market liberalisation policy saw the devaluation of the naira as the “willing buyer, willing seller” model was introduced.

The apex bank abolished the hitherto multiple exchange rate windows and collapsed them into the business-based Investors and Exporters (I&E) window.

Afterwards, the naira, which had exchanged at N400 to the dollar at the CBN-controlled official window and N700 to the dollar at the parallel market, went on a free fall to over N1,000 to the dollar in Dec. 2023.

The policy also worsened inflation in the country, as evidenced by the sky-high costs of goods and services.

Some stakeholders believed that floating the naira at that time, even with so much dollar illiquidity, was ill-advised.

Others urged the CBN to employ monetary policy tools to stabilise and strengthen the naira and to also tackle inflation.

Mr. Okechukwu Unegbu, a past president of the Chattered Institute of Bankers of Nigeria (CIBN), urged the CBN to use its monetary policy tools to moderate the exchange rate and drive down inflation.

“President Bola Tinubu already took some sensitive policy decisions, even before appointing the CBN governor and the finance minister.

“Floating the naira was a major error that has caused the nation so much pain,” he said.

Mr Bismarck Rewane, an economist and Managing Director of Financial Derivatives, a business management consultancy firm, said that loose monetary conditions were totally different from tight monetary policy.

“You fight loose monetary conditions by tightening monetary policy.

“There will be an effect of that because interest rate will increase, people will save more and consume less, and the currency will stabilise over time. There is no quick-fix,” he said

However, at the meeting of its Monetary Policy Committee (MPC) in February, the first to be chaired by Yemi Cardoso as governor, the apex bank adopted an aggressive tightening of the Monetary Policy Rate (MPR) by 400 basis points, from 18.75 percent to 22.75 percent.

Cardoso said that on-going reforms at the CBN would check rising inflation and address distortions in the foreign exchange market.

He listed some of the reforms, including the unification of the foreign exchange market and the promotion of a willing buyer, willing seller model.

Carfoso said that other reforms were the removal of all limits on margins for International Money Transfer Operators (IMTO) remittances, the introduction of a two-way quote system, and the broad reforms in the Bureau de Change (BDC) segment of the market.

After that meeting, the naira began its progressive movement upward, an indication that it responded positively to the MPC decision to tighten the lending rate aggressively.

Shortly after, the CBN announced the revocation of operational licences for 4,173 Bureaux de Change (BDCs) for failure to observe some regulatory provisions.

The apex bank stated that it was revising the regulatory and supervisory guidelines for BDC operations in Nigeria, adding that compliance with the new requirements would be mandatory for all stakeholders in the sector.

Again, at its MPC meeting in March, the CBN announced another aggressive policy tightening, raising the MPR by another 200 basis points, from 22.75 percent to 24.75 percent.

Cardoso said that the recent stability achieved in the foreign exchange market was commendable and had started yielding results.

“The committee noted with satisfaction the level of stability achieved in the foreign exchange market in the last few weeks.

“This, in the view of members, reflects the impact of the CBN’s recent policy actions and reforms, as well as increased transparency in the market.

“In addition, the committee noted the efforts of the apex bank to offset verified foreign currency obligations, an action that will greatly enhance investor confidence and attract foreign investments to Nigeria,” he said.

The President of the Association of Bureaus of Change of Nigeria (ABCON), Aminu Gwadabe, said that recent monetary policy decisions of the CBN had made the naira gain value.

According to Gwadabe, the dollar exchanging at between N1, 300 and N1,900 was inorganic.

“I see the Naira maintaining its organic journey, which is N1,200 to the dollar, ” he said.

He said that the CBN had taken a lot of measures to stabilise the foreign exchange market by way of treasury bills that had attracted billions of dollars, with the promise of almost 30 billion dollars coming in.

“The CBN has also fixed the lending rate to 24.75 percent so as to reign in inflation.

“The apex bank also raised the Cash Reserve Ratio (CRR) of banks to reduce liquidity that is chasing after the dollar,” he said during a recent interview with the newsmen.

Gwadabe said the most effective measure was the inclusion of Bureaux de Change (BDCs) into the official foreign exchange window.

He said that the security agencies were also tracing unearned incomes that were used to chase foreign currencies.

“There is a lot of progress in that regard. A lot of information on how stolen money is being moved around is being gathered.

“And now, there is dererent. People are watching keenly now to know whether to speculate. The trajectory is sustainable,” he said.

The CBN recently sold N676.65 billion through the Open Market Operation (OMO) at a 21 percent interest rate to manage the money supply.

Findings by the News Agency of Nigeria (NAN) revealed that the CBN has sold Treasury bills worth over one trillion Naira since the first quarter of 2024.

This is a move to mop up excess cash liquidity in the economy in a bid to further strengthen the naira and tame inflation.

The apex bank is projected to spend around N1.01 trillion in interest to defend the naira.

Primarily, the move targets the management of the banking system’s liquidity to prevent an oversupply of Naira, which could trigger inflationary pressures.

Also, it aims to provide an avenue for the CBN to stabilise the financial market by offering competitive returns to investors, thus aligning the country’s monetary policy with its economic objectives.

The CBN also announced that it had processed and cleared an inherited backlog of seven billion dollars in foreign exchange claims to beneficiaries, a step that has improved investors’ confidence in the Nigerian economy.

However, the Lagos Chamber of Commerce and Industry (LCCI) complained about the effect of the high interest rate on CBN’s Treasury bill.

The LCCI Director-General, Dr. Chinyere Almona, said that such a high interest rate was drying up funds from the private sector into the government's treasuries.

She urged the CBN to reconsider its decision on the interest rate hike.

She said that the objectives of the apex bank to curb inflation and stabilise the exchange rate were commendable.

She, however, said that there was a need for such objectives to be achieved without impeding private sector endeavours and economic expansion.

As the Naira continues to respond positively to various monetary policy measures by the CBN, stakeholders are hoping that the currency sustains its upward trajectory.

Most Nigerians project, at least, a two-digit exchange rate against the dollar and other strong currencies in the not-too-distant future.