CBN’s efforts to leverage forex stability for single digit inflation

In the first two months of this year, Nigerians witnessed steady appreciation of the Naira and convergence of the official and parallel markets exchange rates around N1,500 per dollar.

The above development, which hugely contrasts with the volatility, steady depreciation of the Naira which characterised the same period of last year, resulted from a series of measures introduced by the Central Bank of Nigeria, CBN, to ensure orderliness and transparency in the forex market with the aim of boosting confidence and foreign exchange supply.

These include payment of the $7 billion FX forward backlog, restriction on banks FX holdings, restriction on dollar remittance by International Oil Companies, IOCs and elimination of cap on the spread on fx transactions.

The measures also include removal of the allowable limit exchange rate quoted by International Money Transfer Operators; window for IMTOs to access Naira to pay beneficiaries of diaspora remittance; restriction of the payment of Personal and Business Travel Allowances (PTA/BTA) to electronic channels only; and access to official market for bureaux de change via banks to purchase up to $25,000 per week at prevailing rates.

Furthermore, the CBN, towards the close of last year, introduced the use of the Bloomberg BMatch as the Electronic Foreign Exchange Matching System (EFEMS) for its FX trading activities in the FX market.

According to the CBN, “This development is expected to reduce speculative activities, eliminate market distortions, and give the CBN improved oversight capabilities to effectively regulate the market.

“The Bloomberg BMatch platform will enhance the integrity and operational efficiency of the FX market by providing transparent and automated matching of trades leading to market efficiency and greater price discovery.”

And to consolidate the impact of the above measures, the CBN on January 28th this year introduced the Nigerian Foreign Exchange (FX) Code which is based on the principles of the Global FX Code and best practices in leading jurisdictions.

Addressing Chairman and Chief Executives of banks at the launching of the Code, CBN Governor, Mr. Olayemi Cardoso said: “The FX Code represents a decisive step forward, setting clear and enforceable standards for ethical conduct, transparency, and good governance in our foreign exchange market. It is a firm signal that business-as-usual will no longer suffice.

“Let us be clear: the system itself played a key role in the challenges of the past. Unethical behaviours and systemic abuses – whether by those with privileged access or by complicit participants – eroded public trust and harmed our economy.

“We will not tolerate any attempts to revert to those practices. Any individual or institution that violates the FX Code will face swift and decisive sanctions.”

Following the combined effect of these measures, the Naira appreciated to its highest level in seven months, in the parallel market on Monday February 24th, closing at N1,500 per dollar.

The last time the Naira traded below N1,500 per dollar in the parallel market was Friday June 21st last year when it traded at N1495 per dollar.

At the official market on the same day, the Naira closed at N1,504 per dollar. Thus, the gap between the parallel and official markets exchange rates, a major destabilising factor in the forex market, was not just eliminated, but became negative.

Analysis also showed that in the first seven weeks of the year, the Naira recorded 9.4 per cent and 2.2 per cent Year-to-Date, YtD, appreciation in the parallel and official market from N1655 per dollar and N1538.5 per dollar from the close of last year to N1,500 per dollar and N1504 per dollar respectively.

Single digit inflation

With the improvement in the fortunes of the Naira and stability in the forex market, the CBN according to Cardoso is now better positioned to tame the historic high inflation confronting the country, achieve single digit inflation and also spur economic growth through improved foreign exchange inflation.

Speaking at the press briefing after the Monetary Policy Committee, MPC, meeting in February, Cardoso said: “Confidence is gradually returning to our markets, which shows that we are on the right course now.

*Obviously, as that happens, we are in a better position to begin the process of moderating interest rates, because stability is very, very important, and if investors do not see stability, they do not come to those markets.

“So our own objectives have been and will continue to be, to achieve stability in the foreign exchange markets and in the financial markets, that’s our objective. And as long as that happens, we are confident that we will begin to see more investments coming in, which should spur the badly needed growth.

“One other thing I will add to that is the fact that as of now, our currency is a lot more competitive. And with that competitiveness. We’ve seen an increasing interest from the international investors to want to come and invest in the country’s future.”

On the outlook for inflation, he added: We will continue the orthodox monetary policies that we have embarked upon. We’ve seen the outcome, and it’s in a positive direction, and we will stay that course. We will certainly stay that course.

“We will be vigilant. We will not take anything for granted. We believe that inflation has been too high for too long. It has been too high for too long. So our objective in the medium to long term is to ensure that we are able to bring this down from the double digit to the single digit.”

Speaking further, Cardoso said that the MPC is hopeful that the stability in the forex market will impact the downward trend in prices of goods and services.

He said, “At this meeting, the Monetary Policy Committee noted with satisfaction recent macroeconomic developments which are expected to positively impact price dynamics in the near to medium term. These include the stability in the foreign exchange market with the resultant appreciation of the exchange rate and the gradual moderation in the price of Premium Motor Spirit (PMS).”

Fiscal, monetary collaboration

A critical ingredient to safeguarding the stability achieved in the forex market and leveraging gains thereof to achieve the objective of single digit inflation rate, is collaboration between the monetary and fiscal authorities.

According to Cardoso this prompted the apex bank at its recent Monetary Policy Forum to engage in prolonged dialogue with various stakeholders in the economy.

He said: “I cannot overemphasize how important it is this time around, because it is coordination that will ensure that the gains that we have made in the various markets not only hold but continue to improve. I will be deceiving you to say the fiscal will do it on its own. The monetary will do it on its own. It won’t be.

The coordination we’ve always known has been important, but at no time can it be as important, in my view, as the situation we have now, because we are in a period where we can see change in a positive direction, and we need to not only maintain, hold, but improve it.

“The recent Monetary Policy Forum that we had, which was designed to look at a number of the things that all of you have asked today, we had, not only the organized private sector present, we had the BDCs. We had multiple stakeholders there. But in addition to that, we also had very strong representation from the fiscal side, including the Minister of Finance/ Coordinating Minister of the Economy. We had the Minister of Budget and Planning present. The Minister of Trade and Industry was present. The Minister of State Finance was present. The Senate was very highly present. We also have the Permanent Secretary, who is also a member of the MPC. We also had the Governors Forum, because that’s a very important body. And they were also present. And of course, myself and all the deputy governors were present. And we spent hours in dialog.

“And two things that I will say have come out from this, a number of different things, you know, granular, but two things I will say, one is to a commitment to increase the depth of the dialogue that we are going to be having with the fiscal side, to increase the depth so that, obviously, like what we’ve done, we will expand it and go into many other areas that affect the economy.

“And then secondly, very importantly, the regularity. We don’t have to wait for anybody to feel that there’s a problem before these meetings are called, we are going to be calling them on a very, very regular basis.”