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Cardoso’s fight for the soul of the Naira.

Techeconomy.ng

Cardoso (or Cardi if you like) inherited a 7 billion USD forex demand backlog which was putting downward pressure on the exchange value of the Naira. And because of the downward spiral of the currency, some people had made a business of betting against the Naira (speculating), adding more downward pressure on the currency.

Cardoso made it a mission to clear the backlog of dollar demands in the economy and stop the speculation. His approach was to settle legitimate dollar demands and curb the activities of speculators. 

To address the demand backlog, He commissioned an audit which found that 2.4 Billion USD out of the 7 billion USD was fraudulent and the government would not fulfil those demands. He had already cleared 2.5 billion USD related to the aviation, manufacturing and energy sectors. And this week, The CBN announced the clearance of the remaining 2.1 Billion USD owed. 

To address speculators, Cardoso carried out some market signalling and introduced new policies around Banks holding foreign currency and the laws guiding international money transfer (which we covered previously). He also made the controversial move of banning Binance and arresting its executives. All this was aimed at closing the channels people used to “manipulate” the currency. 

By clearing the backlog and handicapping the speculators, He would hopefully remove the short-term demand pressure on the Naira in the foreign exchange market. 

On the supply side, He has raised the Monetary policy rate (MPR)  to 22.75% to curb inflation and attract foreign Investors to the Nigerian bond market. The supply move seems to be working as Cardoso claimed that over 2 billion USD has come to the country via Foreign Portfolio Investments between January and February 2024. 

So What??

From a monetary policy standpoint, the new Central Bank Government is hitting the right spots to save the Naira and this is truly commendable. 

However, it remains to be seen how fiscal policy will respond. As we have alluded to in previous editions of the newsletter, Nigerian economic problems can not be solved by the Central Bank alone. You can not have budget padding allegations and instances of corruption on the fiscal side and achieve the desired outcome. 

The fiscal policy (Federal Government) must get its act together and align with the central bank to address other currency and inflation drivers that interest rates can not solve. Things like Investment in infrastructure, reducing the cost of governance, addressing insecurity, and increasing Nigeria’s productive capacity are all vital to bringing down inflation and stabilising the currency in the long term. These are things the CBN can not do, the federal government must play their part.