Recent depreciation of the Naira reflects the absence of efforts to ensure ample foreign exchange liquidity: Report

A recent report by Agora Policy opined that the recent depreciation of the naira in May reflects the lack of efforts by the Central Bank of Nigeria (CBN) to ensure large foreign exchange inflows to boost supply liquidity.

The report titled “Orthodox monetary policy restored, but price stability remains elusive” stated that long-term problems with oil production, NNPC swap contracts and implicit subsidy payments on imported gasoline were impediments to the free flow of foreign exchange from crude oil sales. to the foreign exchange reserve to increase supply.

He further added that the CBN’s monetary policy actions were merely cosmetic in light of the lack of efforts to increase the supply of liquidity to the foreign exchange market to stabilize the naira.

Indeed, the Naira appears to be in an area of ​​continued downward pressure with renewed weakness in May 2024 towards new lows of NGN 1500-1600/$ despite the adoption of supposedly liberal exchange rate policies that should have supported an appreciation .

“This development reflects the absence of direct efforts to ensure a large source of foreign currency liquidity amid persistent problems with flows related to oil exports, where an implicit fuel subsidy and large legacy liabilities linked to refined oil swaps for crude oil continue to restrict organic flows in dollars. “Therefore, it would appear that the CBN’s monetary policy actions are merely cosmetic with no direct attempts to increase dollar liquidity to stabilize the supply picture.”

Bank recapitalization

On the other hand, the report applauded the CBN for the unification of the foreign exchange market and the near convergence of prices between the official market and the parallel window, which was a key campaign promise of President Tinubu.

On bank recapitalization, the report criticizes the apex bank for the exclusion of retained earnings when calculating the new capital requirements, stating that it is controversial and contradicts the CBN’s historical position that encourages banks to retain earnings against payments such as dividends. . He stated that the rejection of retained earnings means that the CBN now lacks justification for its previous position.

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What you should know

  • In April, during the spring summit of the World Bank and IMF, Central Bank Governor Yemi Cardoso declared the naira the best-performing currency in the world, referring to a Goldman Sachs report. During this period, the naira was trading at just over N1,000 to the dollar in the official market following the sale of dollars to BDCs at rates lower than the official market rate.
  • However, since then, the naira has been falling losing 26% at the end of April and reaching levels of 1,500 naira/dollar, similar 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 maintain interest rates or continue the increase.