A recent report from Agora policy has opined that the recent depreciation of the naira in May reflects the lack of efforts on the part of the Central Bank of Nigeria (CBN) to secure large forex inflows to boost supply liquidity.
The report titled, “Orthodox Monetary Policy Restored, But Price Stability Remains Elusive” stated that long-term issues with oil production, swap contracts by the NNPC and implicit subsidy payments on imported petrol were impediments to the free flow of forex from crude oil sales to the foreign reserve to boost supply.
It added further that the monetary policy actions of the CBN were merely cosmetic in light of the lack of effort to raise supply liquidity to the forex market to stabilise the naira.
It stated, “Indeed, the Naira appears to be in a realm of constant downside pressures with renewed weakness in May 2024 towards fresh lows of NGN1500-1600/$ despite the adoption of supposedly liberal FX policies that should have supported an appreciation.”
“This development reflects the absence of any direct efforts at securing a large source of forex liquidity amid lingering issues with oil export related flows where an implicit fuel subsidy and large legacy liabilities linked with the refined petrol for crude swaps continues to curtail organic dollar flows. Thus, it would appear that CBN’s monetary policy actions are merely cosmetic without direct attempts at raising dollar liquidity to stabilise the supply picture.”
Bank recapitalisation
On the other hand, the report applauded the CBN on the unification of the forex market and near price convergence between the official market and the parallel window which was a key promise of the President Tinubu campaign.
On bank recapitalisation, the report faulted the apex bank on the exclusion of retained earnings in calculating new capital requirements stating that it is controversial and contradicts with the CBN’s historical position which encourages banks to retain profit against payouts as dividends. It stated that the rejection of retained earnings means the CBN now lacks justification for its prior position.
What you should know
- In April, during the World bank-IMF spring summit, the Governor of the Central Bank, Yemi Cardoso declared the naira as the best performing currency in the world referencing a Goldman Sachs report. During this period, the naira traded at just over N1000/$ on the official market following the sale of dollar to BDCs at rates lower than the official market rate.
- However, since then, the naira has been on a slide losing 26% by the end of April and reaching the N1,500/$ levels akin to a market correction after the surprising strengthening seen in late March and early April.
- The CBN will announce the outcome of its Monetary Policy Committee (MPC) meeting later today where it will decide to hold interest rates or continue the hike.