Clearance of FX backlog, should be top priority for Cardoso, says CPPE

The Centre for the Promotion of Private Enterprise (CPPE) has called upon Olayemi Cardoso to make the clearance of the backlog of forex exchange obligations a top priority during his initial week as the newly appointed Governor of the Central Bank of Nigeria (CBN).

This non-governmental organisation, dedicated to promoting, safeguarding, and advancing private enterprise within the Nigerian economy, conveyed this message through a press statement titled “Ten Point Agenda For The CBN Governor.” The statement was released on Sunday and shared with BusinessDay.

Muda Yusuf, the Managing Director and CEO of CPPE, signed the statement, emphasising that clearing the backlog of foreign exchange obligations is a crucial step that the CBN’s new leadership must take to rebuild confidence within the FX market.

Regrettably, the loss of confidence in the FX market has led to a widening gap between the official exchange rate and the informal or parallel market rate. This discrepancy has become more pronounced as the naira’s value continues to decline against major global currencies.

On Friday, the naira reached its lowest point at N995 against the U.S. dollar due to heightened demand and insufficient supply.

The CPPE said, “The clearance of the backlog of forex obligations should be accorded high priority to restore the confidence of domestic and foreign investors.”

Before offering this counsel, the organisation had previously cautioned the CBN about the importance of implementing strategic and transparent interventions in the forex market to minimise volatility, to the extent that the reserves could support it.

Furthermore, it suggested that the newly appointed CBN management team should, in addition to the existing investor and exporter FX exchange window, “create an autonomous window in the banking system where the currency can trade freely without any encumbrances.”

This move, according to their explanation, would help diminish the inclination to sell remittances in the street FX market, commonly referred to as the black market.

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In addition to its primary goal of restoring confidence in the foreign exchange market, the CPPE emphasised, as part of its 10-point agenda, the necessity for the Cardoso-led CBN management to enhance the financial system.”

It added that deepening of the financial system entails “the mobilisation of financial resources from the surplus end of the economy to the deficit segment of the economy.” What that means is that the CBN should try to provide much-needed financial assistance to economic sectors that are in need of financial support.

The organisation highlighted that despite being Africa’s largest economy, it was disheartening to observe that as of 2022, the credit extended by the banking system to the private sector in Nigeria stood at a mere 20.6 percent. This figure fell short of the African average of 28 percent and was significantly below the global average of 145 percent.

Aside from the above-mentioned statistics, it lambasted the situation where “small businesses, which account for an estimated 50% of the GDP, have access to just about one percent of the credit in the banking system.”

It advised that, as a result of these negative indices and others, it had become very important that the Cardoso-led CBN devote energy to “deepening the financial system for stability.”

Efficiency of the financial system, capital requirements for banks, ways and means financing of fiscal deficits, naira redesign policy, and tenure and cost of funds in the banking system made up its third to seventh recommendations in its press statement.

While concentration risk in the banking sector, stakeholder engagement, and corporate governance make up the remaining three recommendations.

On the efficiency of the financial system, it urged the new management to address the huge spread between deposit and lending rates in the Nigerian banking system. Acknowledging that its huge spread will continue to affect the growth of investment and savings in the country.

On capital requirements for banks, Yusuf advised that “the minimum capital requirements of the banking industry needed to be reviewed in the light of the considerable loss of value amid depreciating domestic currency.”

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CPPE said, “It is important to ensure that the capital base of banks can support their current exposures in the interest of the stability of the financial system.”

On ways and means financing of fiscal deficit, the organisation urged the new CBN to keep it “within statutory limits to avoid the damaging impacts of high-powered money on the macroeconomic environment. The experience of the last few years must not be allowed to repeat itself.”

On the naira redesign policy, CPPE was vocal as it advised that the policy must be suspended indefinitely, noting that as of now it shouldn’t be a priority. There was really no compelling argument to undertake the naira redesign in the first place.

It, however, urged the apex bank to continue to drive the momentum witnessed in the cashless economy’s growth.

On the tenure and cost of funds in the banking system, CPPE said that “there is a need to address the macroeconomic fundamentals to correct this maturity structure of funds in the banking system.

“The lending rate in the economy is very high and detrimental to investment and economic growth. SMEs pay as high as 30% interest on loans.

“For non-bank financial institutions, the rates are even more atrocious. This is not conducive for investment growth and job creation. Bringing down the interest rate will require a mix of monetary and fiscal policies.”

On concentration risk in the banking sector, it was advised that “steps should be taken to reduce concentration risks in the banking system as a strategy to manage systemic threats to the bank system.”

It explained that a situation where the top ten banks in the country accounted for 80 percent of bank assets, total loans, and deposit liabilities wasn’t only unhealthy but posed “systemic vulnerability risks” for the economy.

It urged the CBN to ensure a “better spread of assets and liabilities in the banking system is desirable.”
On stakeholder engagement, the new CBN was advised to relate well with stakeholders, both in the public and private sectors. It should remove the territorial mindset of the past and be ready to engage with other ministries and agencies whose activities impact the investment environment, as advised by CPPE.

Finally, on corporate governance, the CPPE urged the Cardoso-led CBN to “observe the high standards of corporate governance to preserve the credibility and integrity of the apex bank. There should be a level playing field for all operators in the financial sector. Regulatory process must be transparent, fair, equitable, and firm.

The CBN should be apolitical. Involvement of the CBN leadership, any of its officers, members of the MPC, and board members in partisan politics should be avoided.”