The Minister of Finance and Coordinating Minister of the Economy, Mr. Wale Edun has addressed reports credited to the Governor of the Central Bank of Nigeria (CBN), Yemi Cardoso of FAAC disbursement resulting in significant pressures in the FX market.
Mr. Edun addressed this concern while taking questions from journalists during the ongoing World Bank/IMF summit in Washington D.C. on the statements by the CBN Governor on FAAC disbursements resulting in the depreciation of the Naira.
According to Edun, the problem will Nigeria’s foreign exchange market is supply and as an oil-producing nation, Nigeria could address that by significantly increasing her oil production output.
He said, “The key about the foreign exchange market really is supply and as you know we are an oil-producing country, we just need to get our oil production up and that will deal with that issue of foreign exchange supply and pressure on foreign exchange anytime there are large flows.”
While speaking on having a single-digit interest rate, Mr. Edun noted that for now, the CBN will continue monetary policy tightening until inflation is defeated and noted that Western economies could drop MPR because they have successfully defeated inflation.
Backstory
At the last Monetary Policy Committee (MPC) meeting, the Governor of the CBN, Mr. Yemi Cardoso who doubles as the MPC Chairman stated that members of the MPC had noticed a correlation between the period of FAAC disbursement and demand pressures in the foreign exchange market.
According to him, the apex bank will monitor future FAAC allocation disbursement to determine the impact on the FX market.
He stated, “Furthermore, members observed a strong correlation between FAAC releases and liquidity levels in the banking system as well as its impacts on the exchange rates.”
“The committee therefore agreed to increase monitoring of future releases with a view to addressing its effects on price development.”
What you should know
The removal of the petrol subsidy in May 2023 has led to a significant increase in monthly disbursements by the three tiers of government through the Federal Accounts Allocation Committee (FAAC), driven by the elimination of subsidy payments.
Additionally, the difference between the 2024 budget exchange rate of N800/$ and the prevailing rate has positively impacted FAAC allocations, contributing substantially to total disbursements.
A study by Agora Policy revealed that between May 2023 and April 2024, exchange rate gains added N4.23 trillion to FAAC allocations, accounting for approximately 20% of the total disbursements during that period. In contrast, exchange rate gains averaged only 1.32% of total FAAC allocations over the previous four years.