The Central Bank of Nigeria has received counsel to refrain from intervening in the foreign exchange market through forex auctions.
Additionally, it has been recommended that the bank consistently reaffirm its commitment to exchange rate flexibility by implementing a comprehensive, systematic, and transparent framework for foreign exchange interventions.
This policy advisory, issued by the World Bank, was part of the Nigeria Development Update, which provides suggestions for stabilizing the naira against foreign currencies.
On August 26, 2024, the CBN conducted a retail Dutch auction, selling $876.26 million to end users, marking a significant shift from its previous practice of selling foreign exchange to Bureau De Change operators.
This auction represents one of the most notable foreign exchange interventions by the CBN under Governor Yemi Cardoso, who has been actively working to stabilize the naira and mitigate the ongoing volatility in the foreign exchange market.
The central bank stated that the auction aimed to improve foreign exchange liquidity in the market, reduce demand pressure, and support price discovery in line with its objectives.
According to the sales report, 3,347 firms accessed the dollars through 26 banks, with a cut-off rate of N1,495 per dollar.
However, the Bretton Woods Institution, in its latest report, emphasized that allowing market participants to trade foreign exchange with greater flexibility over time would also help deepen the foreign exchange market.
The report stated, “Exchange rate policy should continue to be geared towards maintaining a unified, market reflective exchange rate, whilst deepening the FX market. The CBN should continue efforts towards deepening the official FX market, including by facilitating formal remittances inflows, allowing international oil companies to fully concentrate their FX sales in the official market, restoring intermediated market access to bureaux de change, and refraining from ad-hoc FX auctions.
“Allowing market participants to trade FX with more flexibility across time would also contribute to deepening the FX market.”
The bank emphasized the importance of strategically building foreign reserves to more accurately assess the fair value of the naira against foreign currencies. This approach aims to foster a stable and predictable economic environment that benefits both domestic and international trade.
Moreover, a consistent commitment to exchange rate flexibility, along with the implementation of a comprehensive, systematic, and transparent framework for Central Bank of Nigeria (CBN) foreign exchange interventions, is essential. Such measures would help align exchange rate expectations with economic fundamentals rather than perceived target levels. Maintaining a single, market-reflective exchange rate is vital for enhancing fiscal revenues from oil and other export-related taxes, attracting investment, and building external reserves, thereby creating favorable conditions for investment and inclusive growth.
It remains uncertain whether the central bank will implement these recommendations.
During the IMF/World Bank annual meeting in Washington, D.C., Finance Minister and Coordinating Minister of the Economy, Wale Edun, indicated that the government has not fully adopted all policy recommendations from international agencies.
He highlighted the significant over-subscription of the $500 million domestic bond, stating that while the insights and data provided by these institutions are valuable, it is not always necessary to follow their advice.
Additionally, the World Bank reported a concerning rise in non-performing loans (NPLs) among Nigerian banks, which have reached 5.1 percent, according to a recent report.
The Nigeria Development Update released by the global financial institution noted that the ratio of NPLs to total loans increased by 0.6 percent to 5.1 percent in the first quarter of 2024, compared to the same period in 2023.
This ratio slightly exceeds the prudential benchmark of 5.0 percent, according to the report.
Non-performing loans refer to those for which the borrower has failed to meet payment obligations by the agreed-upon deadline.
When the ratio of non-performing loans at a bank surpasses 5 percent, it indicates that a greater proportion of loans are at risk of default compared to what is typically deemed secure.
The World Bank has also highlighted that the capital buffers within the banking system have diminished, attributing this erosion to high inflation, significant depreciation of the naira, and the rising non-performing loan ratio.
As of Q1 2024, the capital adequacy ratio for the banking sector stood at 11.1 percent, a decrease from 14.2 percent in Q1 2023.
Additionally, it was noted that the Central Bank of Nigeria (CBN) has conducted substantial open market operations, absorbing N6.6 trillion, which is 30 percent more than the total amount over the past three years.
Crucially, the CBN has implemented the decisions of the Monetary Policy Committee (MPC) through extensive open market operations at rates closely aligned with the Monetary Policy Rate (MPR). In the first eight months of 2024, these operations totaled over N6.6 trillion, representing a 30 percent increase compared to the combined total of the previous three years.
The monetary policy stance has been further tightened by raising the standing deposit facility rate from -300 basis points relative to the MPR to -100 basis points, while the standing facility rate has increased to MPR +500 basis points.
As a result, market rates have recently begun to align with the MPR. The new monetary policy framework has also attracted foreign exchange inflows and reduced naira liquidity, thereby reinforcing the foreign exchange reforms.