CBN’s decision to defend naira gives credence to EIU’s prediction

In a dramatic twist, the Central Bank of Nigeria (CBN) has unleashed a powerful policy manoeuvre to defend the embattled naira. This strategic move not only reaffirms the Economic Intelligence Unit’s (EIU) July prophecy of a return to a managed floating foreign exchange system but also marks a turning point in Nigeria’s financial landscape.

After weeks of turbulent swings in the foreign exchange market, which saw Africa’s largest economy grappling with a frightening 16 percent fall in its currency’s value due to the harmonisation policy introduced in June, the CBN finally decided to answer the calls for intervention. The naira’s near brink of collapse pushed the apex bank to take this once abandoned and less-favoured action.

Read also: CBN moves to save the naira, to inject more dollars, warns speculators

Since the collapse of the multiple official exchange rate windows, the naira has fallen in the I&E window from N460/$ to N730/$, while at the parallel market that welcomes all players, it has fallen to a record low, trading within a bandwidth of N945 and N955 to a US dollar.

Adebayo Shonubi, the acting CBN governor, declared the bank’s intention to shield the naira from impending doom and restore a semblance of stability.

In a candid moment, Shonubi revealed, “The president is very concerned about some of the goings-on in the foreign exchange market. One of the things we discussed were what could be done to stabilise and what could be done to improve the liquidity in the market, and also the goings-on in the various other markets including the parallel market.

“He is concerned about the impact on the average person. The things that you do which are purely local are still referenced to exchange rate in the parallel market. We’ve discussed and I have shared with him what we are doing to improve supply.”

Apparently, the drama happening in the market has finally put paid to the prediction of the EIU, which said that the government was going to act since it doesn’t have enough experience to manage a floating exchange rate system.

Read also: Expect a return to a CBN-controlled exchange rate system – EIU

The EIU cautioned, “The CBN lacks experience in conducting monetary policy under a float, and the need to control rapidly increasing inflation will become more acute over time.

“Our forecast is finely balanced, but we expect a return to heavier exchange-rate management from the second half of 2023 as the naira slides beyond N800:US$1 from N770:US$1 in early July.”

Analysts at the Economist Group’s Research and Intelligence arm had anticipated that the apex bank would ultimately need to tap into its substantial 90 percent liquidity external reserve to arrest the nosedive and rectify the FX imbalances threatening to plunge the nation into socio-economic trouble.

The recently released consolidated financial statement of the CBN showed that over 95 percent of the apex bank’s external reserve, which stands at over $33 billion as of August 2023, proves that the return to a managed floating FX rate system may successfully steady the ship for the nation’s economic managers.

Furthermore, the recent threat by the Nigeria Labour Congress (NLC) and the Trade Union Congress (TUC) to go on strike any moment soon due to the intentions of the independent oil marketers to raise the pump price of fuel anytime soon amplified the urgency.

The sudden announcement by the acting CBN governor, assuring that they would directly address the FX issue, spread widely throughout the country.

At present, the overwhelming demand for U.S. dollars continues to exert so much pressure on the limited supply.

With promises made by the CBN boss to restore sanity in the market, many questioned the wisdom behind threatening speculators, especially as the February ban of AbokiFX failed to ensure a revaluation of the naira.