According to a Business Day article (“Inflation: Rice, noodles, and garri prices double, leaving millions struggling to eat”) dated February 9th, 2024, the cost of staple food items saw a sharp, 100 percent increase between May 2023 and February 2024. A bag of rice, previously selling for between N33,000 and N35,000, now exchanged hands for c. N65,000, demonstrating the stark adverse effect FX volatility has on the daily lives of average Nigerian families, for whom a commensurate increase in daily income is little more than a fantasy.
In the face of daunting economic challenges, including pervasive FX volatility that has historically undermined economic stability and eroded investor confidence, the Central Bank of Nigeria (CBN), under the relatively recent stewardship of Governor Yemi Cardoso, has embarked on an ambitious journey to stabilise the naira and revitalise Nigeria’s financial ecosystem. A balanced examination of these strategies is key to unpacking and determining their effectiveness and will be the primary focus of this series (with more focus on each item listed below to come in further articles).
Economic backdrop:
The Nigerian economy, still Africa’s largest (change my mind), has long been hinged on oil exports, making it susceptible to global price shocks and exchange rate instability. These economic vulnerabilities have been exacerbated by inconsistent policy frameworks and infrastructural deficiencies. In response, Yemi Cardoso’s tenure at the CBN has been marked by a series of strategic reforms aimed at addressing these perennial challenges, with a particular focus on liberalising the FX market to better reflect real supply and demand dynamics.
Strategic policy interventions:
Since assuming office, Cardoso has introduced several key policies:
FX Market liberalisation: In a significant policy shift, the CBN has moved towards a more liberalised exchange rate system via the removal of a fixed rate and the reduction of currency controls, hoping to foster realistic market equilibrium. While this directive from the CBN has been clearly stated, the bank has, from time to time, actively participated in the FX market, intervening by selling dollars to manage and stabilise the exchange rate. These interventions have been aimed at providing stability across all segments of the FX market, from banks to BDCs.
Clearing FX backlogs: One of the first steps taken under Yemi Cardoso’s leadership was to address the substantial backlog of foreign exchange obligations. The CBN actively worked on clearing valid FX claims, having processed a significant portion of these pending obligations. This move was crucial in restoring trust in the market and ensuring genuine business and investment needs for foreign currency were met promptly.
Monetary Policy Rate Hike: In response to persistent inflation and currency volatility, the CBN enacted two notable increases to the MPR in Q1 2024. The first increase, in February, raised the rate from 18.75 percent to 22.75 percent (400 basis points), with a subsequent hike coming in March, where the rate was further adjusted upwards by 200 basis points to 24.75 percent.
Analysing the impact:
The effects of these initiatives have been noticeable:
Reduction in FX Volatility: The effectiveness of these interventions is evidenced by the gradual reduction in extreme rate fluctuations and improved liquidity in the forex market. However, maintaining this stability will require ongoing vigilance and possibly further adjustments to policy as market conditions evolve.
Boost in Investor Confidence: The policies have been met with approval from the international community, reflected in a rejuvenated interest in Nigeria’s financial markets. In Q1 2024, Nigeria attracted significant foreign portfolio investments amounting to $2bn, showcasing a clear revival in investor interest compared to the total of $3bn recorded throughout 2023.
However, these policies are not without detractors. Critics argue that while the steps may mitigate immediate market pressures, they do not fully tackle underlying economic fragilities, such as high dependency on oil and inadequate infrastructure. Additionally, arguments have been made against recent interest rate hikes, with a focus on the risk of job losses and stunted economic growth. Furthermore, the transition to a fully liberalised FX market has encountered operational issues, including persistent disparities between official and parallel market rates.
Balancing the argument:
While acknowledging these critiques, it is important to recognise the proactive nature of Cardoso’s approach, which has injected a level of assertiveness into Nigeria’s monetary policy framework not seen in recent years. The positive reception from the global business community underscores a cautious optimism that Nigeria’s reforms are moving in the right direction. Nevertheless, the ultimate measure of these policies will be their ability to sustain long-term economic stability and growth. As such, ongoing scrutiny and adaptation will be essential to ensuring their enduring success.
Proposed scorecard for future evaluation:
To objectively assess the ongoing effectiveness of the CBN’s policies, below is a proposed scorecard based on several key metrics:
Stability Index: Monitoring FX rate fluctuations to gauge market stability over time.
Economic impact: Analysing the broader effects of FX policies on GDP growth, inflation rates, and employment within key economic sectors.
Investor confidence level: Foreign Portfolio Inflow Levels will provide a clear indication of international investor confidence in these policy initiatives and will be one such indicator of recent policy effectiveness.
Market integration: evaluating the consistency between the official and parallel FX rates, an indicator of policy effectiveness.
Regulatory compliance and transparency: Reviewing the CBN’s adherence to its own policy guidelines and the transparency of its FX allocations.
Governor Yemi Cardoso’s strategies at the Central Bank of Nigeria represent significant steps towards stabilising the FX market and rebuilding financial sector confidence. Though these policies face challenges and criticism, they have introduced a level of dynamism and proactivity necessary for economic reform. The suggested scorecard will provide a robust framework to continually evaluate these strategies, ensuring they adapt and evolve in response to both domestic and global economic dynamics.
Looking Ahead:
As global economic conditions shift and Nigeria works to diversify its economic base, the agility of the CBN’s policy responses under Cardoso’s leadership will be pivotal. With the world watching, further reforms are anticipated, aiming at not only stabilising the economy but also positioning Nigeria as a formidable economic force in Africa and beyond.
Samuel Adeleke Adelaja: Head, Partnerships at Airtel Business Africa; Investment Director at Airtel Africa
