Nigeria’s lingering foreign exchange crisis doesn’t seem to bother the Central Bank of Nigeria (CBN) enough for Governor Olayemi Cardoso to spring into much-awaited action.
Steps proffered by experts to boost dollar liquidity have fallen on deaf ears, even as the naira’s downward spiral at the more accessible parallel market has resumed in 2024, worsening the suffering of businesses and households.
The naira weakened to 1,290 per US dollar in the parallel market on Tuesday, a four-month low, according to data obtained from multiple traders.
The deceitful picture painted by the official rate, which has been appreciating this year, adds to suspicion that the CBN is not serious about enthroning transparency in the market, one of the factors critical to restoring investor confidence.
The official rate, which opened at N907.11 per US dollar on January 2, has appreciated to N878 per dollar (as at Tuesday) since then, even though the CBN has not sold dollars in the market since September 2023.
Intra-day prices in the official market or the Nigerian Autonomous Foreign Exchange Market (NAFEM) go as high as a thousand naira and above but the rate always almost closes at a stronger rate at the close of trading.
The CBN has neither fully enthroned the transparency around pricing nor delivered the higher market interest rates required to lure dollars into the FX market.
The customary Monetary Policy Committee (MPC) meeting, which not only served the purpose of interest-rate setting but also an opportunity for the press to engage the CBN governor in question and answer sessions, now has no pattern to its scheduling.
The MPC meeting has not been held since the appointment of Cardoso last October.
The governor fired back at critics by saying the MPC is only mandated to meet four times a year but has provided no guidance about the new structure for holding the meetings, adding to confusion in the market.
In addition to the confusion, the DMO has also not published its bond issuance calendar 16 days into the new year.
Interest rates below inflation worsening FX crisis
The one-year Treasury bill sold for 12.24 percent at the last auction on January 10, less than half of the country’s soaring inflation rate, which the National Bureau of Statistics said hit 28.92 percent in December, the highest in more than 18 years.
This means investors in the one-year T-bill will be booking a negative real return of 16.68 percent, the worst among African peers from South Africa, which has a positive real return of 4.2 percent, and Egypt, whose negative return of 7.3 percent is much better than Nigeria’s.
“The rate on the T-bills, not OMO, has to go up to at least 25 percent for it to make sense for locals to either offload their dollars or for foreign portfolio investors to come,” a senior investment banker said.
“If the CBN did that and enthroned a transparent price mechanism in the NAFEM, half of the country’s FX problems will be solved,” the banker said.
The longer the CBN keeps market interest rates artificially low, the more Nigerians will flock to dollars, piling more pressure on the naira.
The CBN seems to be in bed with the federal government and is not keen to allow rates to go up due to the impact that will have on the government’s borrowing costs.
At over 90 percent, Nigeria’s debt service costs as a percentage of revenue is a cause for concern.
However experts say market interest rates would not stay high for too long once liquidity improves.
Nigeria will have to decide fast on how best to fix its foreign exchange market but as long as interest rates remain uncompetitive it’s not hard to see why Nigerians are flocking to dollarised assets and the naira is tumbling.
In the interim, the economy is paying the ultimate price of the CBN’s lack of urgency in addressing the FX crisis.