The new approach to an old problem

The CBN’s renewed fight for the Naira

getcarefull.com

In August 2023, we published an article highlighting the continued divergence between the official and black market foreign exchange rates despite the devaluation by the new administration. Six months later, the CBN is still battling with reconciling the rates and stopping the continued slide of the Naira. 

However, in a renewed fight for the life of our dear Naira, the CBN released four circulars between the 29th and 31st of January 2024. The four circulars focused on driving transparency and liquidity in the foreign exchange (Forex) market. It also aimed to reduce currency speculation by banks.

The first circular warned against under-reporting rates by market participants i.e. buying at a high rate and then recording a lower rate. 

The second one instructed the Banks to ensure their (net open positions) NOP does not exceed 20 per cent short or 0 per cent long of the bank’s shareholders’ funds. Simply put, banks should no longer hold excess dollars. This move reduces the ability of banks to speculate on the Naira and minimises their ability to benefit from Naira depreciation. It also listed some measures to reduce Forex-related risks.

The third and fourth circulars focused on International Money Transfer Operations (IMTO). The circulars removed the trading cap on IMTO remittances and set up new capital and regulatory requirements for getting an IMTO license. 

So What?

The Naira has faced significant devaluation since the new administration implemented a “freer” market model in August 2023. The currency had declined about 45 percent by December 2023 and has seen a further 38 percent decline this year. The main driver of the devaluation has been the lack of dollar inflows in the Nigerian economy. The dollar's illiquidity can be traced to weak investor confidence which manifests as low foreign investments and lower oil revenues. 

The Government's recent moves have been to address the issue on two fronts. The first circular aimed at ensuring market transparency which would serve to boost market confidence. The other three focused on driving market liquidity. That is unlocking the dollar supply from other places. 

The directive to banks would force them to sell excess dollar holding and the directive to IMTOs would mean that more dollars come into the country as IMTOs are now likely to process their dollars in Nigeria because of the removal of the trading caps. 

The two moves will hopefully end the rapid deprecation we have seen in recent weeks. 

But in the longer term, Nigeria must address the structural issues around its Balance of Payment. There must be an increase in export income or a growth in capital inflow. These two are necessary to drive a more stable foreign exchange market. We can not continue to live off government intervention.