Nigerian Naira Struggles Amidst Weak Central Bank Reforms – In a year marked by significant financial upheavals, the Nigerian Naira stands out as one of the world’s worst-performing currencies, with a staggering 60% decline since June. Despite attempts at reform, investor confidence has yet to bounce back.
In June, following President Bola Tinubu’s electoral win, the Central Bank of Nigeria (CBN) transitioned the Naira to a market rate, moving away from an eight-year-long exchange rate control. This shift aimed to attract sidelined investors and bridge the discrepancy between official and street rates of the dollar.
Initially, the change seemed promising. However, allegations soon surfaced that the CBN was reverting to its old habits, manipulating rates and hampering the very market it intended to liberate. As one senior banker remarked, the CBN’s mismanagement has created a chasm between formal and alternative market rates.
Statistics from BusinessDay reveal a concerning trend: liquidity in the formal market dropped dramatically, averaging a daily $99.81 million compared to $295.58 million between May and June 2023. Furthermore, there’s an alarming gap of over N200/$ between the official and parallel market rates, pointing to the scarcity of dollars and the CBN’s interference.
The CBN’s attempts at controlling the market have been transparent, with measures like excluding banks that sell dollars above N799 per USD from its FX sales and monitoring banks for their FX selling rates. Additionally, bans remain on importers of specific items, including steel pipes and milk, from purchasing dollars at banks.
Experts argue that to rejuvenate the market, the CBN needs to relinquish these administrative controls. One banking source emphasized the need for a unified FX market, suggesting the abandonment of the Investors and Exporters window.
Alarmingly, the Naira’s value has plummeted past N1,000 per USD on the streets. This decline, coupled with the CBN’s negative real interest rate policy, has spurred a surge in dollar demand. Investors and savers are now more inclined to purchase dollars, further straining the Naira’s value.
Nigeria’s inflation rate compounds the issue. In August, consumer prices skyrocketed by 25.8%, the highest since 2005. The CBN’s attempts to counteract rising inflation through interest rate hikes have been ineffective, as these rates remain well below the inflation rate.
As Yemi Cardoso, the newly appointed CBN governor and former Citibank executive, steps into his role, he faces the monumental challenge of stabilizing the Naira and rectifying the negative real return on investment. Experts advocate for a complete reversal of former policies and a full liberalization of the foreign exchange market.
Muda Yusuf, CEO of the Centre for Promotion of Private Enterprise, aptly summarized the current sentiment: “Restoring confidence in the FX market is perhaps the most urgent task before the new CBN Governor.”