The Central Bank of Nigeria (CBN) has continued to ramp up efforts to bring in capital inflows to the country through tighter monetary conditions, a move which has seen the naira strengthen against the US dollar.
The naira, which exchanged around N1,900 per US dollar in early February, sold at N1,251/$ last Friday, a major rebound for a currency that was listed among the worst performing currencies in the world.
Between January and February, the apex bank recorded inflows of foreign portfolio investment estimated at $2.3 billion, a sign of foreign investors’ confidence in the economy.
A combined 600 basis points interest rate hike in February and March, which took the rate to 24.75 percent, narrowed the negative return on naira investments and attracted foreign investors.
Days after the jumbo rate hike in March, the CBN reported $1.5 billion in foreign portfolio inflows into the economy, a sign of renewed investor confidence on the back of the apex bank’s reforms.
While the CBN is doing all it can to sustain the momentum by stabilising the economy with monetary policy tools, the federal government needs to support the mandate of the apex bank through strong and sustainable fiscal policies.
Here are the four ways FG can help sustain CBN’s monetary reforms
Sale of dead assets: In a bid to complement Cardoso’s reforms, the presidency needs to speed up its plans to sell some of its assets to get more dollar liquidity.
Argentina eliminated private jets and other official perks in a move to stabilise its economy. It equally sold hundreds of state companies, making the country’s budget turned surplus after witnessing many deficits.
Also, it was through the sale of its land assets to the UAE that Egypt boosted investor confidence in its monetary reforms.
Need for new money: Nigeria is expected to get a Eurobond sometime in June, the first since 2022. While rate hike may be bringing foreign investors, new money guarantees quicker recovery from the FX crisis.
“Rate hike alone may not be a golden bullet that will address inflation. However, new money and intervention from institutions are needed as a backup for a quicker outcome,” Bismarck Rewane, CEO of Lagos-based Financial Derivatives Company, said.
Another quick way to drive in the scarce dollars is through interventions from the Bretton Woods institutions: the International Monetary Fund and the World Bank.
Countries like Egypt and Kenya have recently got bailout funds from the IMF to boost liquidity and carry out certain infrastructural reforms in their countries.
This fund, totalling over $8 billion from the Washington-based institution, has since helped the Egyptian pound to a rally.
Increase in productivity: For a country of over 220 million people, its production capacity is relatively low. Since Nigeria gets roughly 80 percent of its foreign earnings from oil exports, its production at 1.5 million barrels per day may not guarantee much dollar inflow.
“If Saudi Arabia, a country with 36 million or more people could be producing about 9 million barrels per day, then the federal government needs to do better in our oil production,” a source familiar with the matter said.
More liquidity from the NNPC: For long-term stability of the economy, the CBN needs more dollar inflows from the Nigerian National Petroleum Company Limited (NNPC) to boost its reserves and provide a more reliable source of funding for the market.
The CBN needs to make sure the federal government understands that the gains seen with the naira are not sustainable without more stable forex liquidity, hence the need for fiscal sustainability.
