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Rationale results and reflections: unpacking CBN’s recent interventions to save the naira

Rationale results and reflections: unpacking CBN’s recent interventions to save the naira

Some years back, exchange rate talks used to be a conversation for the finance and economics “elites,” but everyone seems to be talking about it today. The reason exchange rates have become the talk of the town is simple — The naira has seen more depreciation in the past twelve months than it has ever seen before.

In February 2023 it cost N460 to get a dollar in the official market. In February 2024, it cost N1,475 to get a dollar in the same market. In other words, the naira is losing value fast. This loss of value has created challenges for Nigeria’s business landscape. Businesses have been hit by increased costs as most of their inputs are imported. Households are not left out of this heat as prices of household items have increased too.

Policies and intervention – The many efforts of the CBN

As the naira kept depreciating over the past year, the CBN didn’t fold its arms. Over the past twelve months, CBN has rolled out several policies to ameliorate the exchange rate crisis and this article explains the logic behind these policies.

Unification of exchange rates

In June 2023, the CBN announced the unification of all the exchange rate windows. Before June 2023, Nigeria had a multiple-exchange window type of FX market: Bureau de Change (BDC) window; Importers and Exporters (I&E) window; and interbank window. These windows were markets to buy and sell foreign currencies.

To keep these windows running, the CBN was “setting” the price and supplying dollars to these markets. The price of the dollar was cheaper in the official market than in the parallel market. In other words, the CBN was trying to control dollar prices by “subsidising” the dollar in official markets.

On June 14, 2023, the CBN announced the collapse of all windows and the existence of the I&E window, operating on a “willing buyer, willing seller” model. This led to the dollar’s official market price moving from N460 to N620 on June 15, indicating market forces’ influence on the price.

Liquidity challenges and excess demand for FX strengthen the parallel market as the naira bleeds further

CBN’s unification of exchange was applauded by many, but it didn’t solve the exchange rate crisis, and the reason is simple: liquidity. The demand for FX kept growing, but there was no dollar supply to meet this demand.

Foreign exchange (FX) was needed for foreign transactions, but banks were unavailable. People sought alternatives, leading to the parallel market or black market, where demand for USD increased. This led to a higher dollar price, reducing the value of the naira. By September 2023, the dollar’s price was N740.

CBN removes FOREX restrictions on the 43 items

On June 23, 2015, the Central Bank of Nigeria (CBN) restricted 41 items, including palm kernels, palm oil, tomatoes, and wheelbarrows, from being imported into the official market. These items were listed as not valid for forex, requiring importers to source USD from the parallel market. The restriction aimed to prevent unauthorised imports.

On October 12, 2023, CBN made a U-turn on the restriction and announced that the 43 items were no longer restricted. In another circular published on October 15, 2023, CBN explained that the initial restriction pushed importers of these items to the parallel market, and this contributed to surplus demand for FX in the parallel market and pushed exchange rates higher.

The CBN explained that removing these restrictions would increase orderliness and price stability in the FX market.

CBN directs banks to sell off excess FX

On January 31, 2024, the CBN issued a circular on the foreign currency exposure of banks. A critical look at the circular shows that the CBN wants to discourage banks from holding the dollar for the sole aim of profiting from the dollar when the dollar rate increases (speculative purpose).

Among other instructions, the circular gave the banks a net open position limit of 20% short and 0% long. The CBN gave banks 24 hours to comply. Meaning that banks are expected to sell off their excess dollars. After this circular was issued, the FX market saw a reasonable increase in liquidity.

Read also: How CBN plans to curb rising inflation as MPC meets this month

CBN publishes revised International Monetary Operators (IMTOs) guidelines

CBN, on January 31, 2024, issued a 19-page revised guideline for IMTOs. The IMTOs include WesternUnion, MoneyGram, Rapidtransfer, and WorldRemit, etc.

The CBN stated that “all inbound money transfers to Nigeria shall be paid to beneficiaries in naira through a bank account or cash.”

It means when money is sent through IMTOs, you get the naira equivalent and not FX.

It is important to note that this policy only applies to funds that come in through IMTOs.

This policy doesn’t apply to USD in domiciliary accounts. The funds in domiciliary accounts will not be converted to naira. Funds sent via wire transfer will hit Dom accounts as USD too.

Removal of spread on FX transactions

On February 8, 2024, CBN announced the removal of the limit on the spread on foreign exchange rates. Spread (or profit) is the difference between the rate banks buy the dollar and the rate they sell the dollar. If a bank buys a dollar at N1400 and sells it for N1420, the spread is N20.

There used to be a limit (cap) to the amount of spread banks charge on FX. Now, the CBN is saying irrespective of the amount the banks are buying their USD, they can sell it at any amount (banks determine their spread). This policy is to encourage the “willing buyer, willing seller” model. This policy is supposed to encourage banks to sell FX.

Way forward

Everyone is wondering — Will all these policies solve Nigeria’s problem?

Nigeria’s economic and exchange rate issues cannot be addressed solely by CBN policies. The country needs a structure to generate foreign inflows, reduce losses from crude oil theft, prioritise public accountability and prudence, and address insecurity to ensure agriculture’s growth.

The CBN’s policies are great but the fiscal and the economic team still have work to do if the country will see economic improvements.

About Author: Leke Olushuyi is a chartered accountant and a Finance Professional