Naira volatility, inflation, banks recap shape year 2024
Three key issues defined the outgoing year, making it a year of surprises for the economy, the population and banks. The rough ride experienced by the naira, the surge in inflation figures and banks’ brave move to raise additional capital to shore up their capital bases are top picks for the year, writes Assistant Business Editor, COLLINS NWEZE.
Olayemi Cardoso assumed the leadership of the Central Bank of Nigeria (CBN), at a time key economy indicators were pointing southwards. The economy faced a stock pile of debts in excess of $108.2 billion, maturing obligations, misaligned currency with over N22 trillion printed bank notes stoking inflation, high interest rates, Foreign Direct Investment (FDI) draught and acute dollar shortage.
The debilitating and lingering effects of the CBN-led naira redesign policy and subsequent cash crunch had put the GDP figures in disarray.
The oil sector, which contributes more than 50 per cent of government revenue and over 80 per cent foreign exchange earnings shrank. The deterioration in the sector’s performance was primarily as a result of lower oil production due to persistent oil theft, pipeline vandalism and frequent declarations of force majeure, negatively impacted dollar inflows that worsened naira stability.
The task of turning the above negative economic indicators around, led the CBN to embark on a series of bold reforms considered long overdue. The reforms were unveiled and their implementation took off immediately including exchange rate unification.
Exchange rate reforms and unification saw the naira recording significant decline at both official and parallel markets.
Managing Director, Financial Derivatives Company Limited, Bismarck Rewane, said the exchange rate unification policy was bold and courageous.
He said: “Exchange rate management goes beyond exchange rate unification. It must address issues surrounding market structure, easy access and adequate supply. This means effectively dismantling forex rationing, administrative controls and reviewing import restrictions.”
Despite its numerous setbacks, Rewane insisted that the current exchange rate framework has brought about transparency in the forex market, reduced exchange rate misalignment and transaction costs, and opened the economy to offshore investors.
The CBN, also within the year took steps to expand FX sources. For instance, Nigeria’s source of funds from the diaspora, Nigerians living and working abroad who have families here and who are interested in keeping a presence here. We have to encourage them to save in Nigeria perhaps by improving payment mechanisms.”
The naira has maintained relative stability in the foreign exchange market, bolstered by inflows from the Nigerian diaspora returning home for Christmas, proceeds from a recent Eurobond issuance, and enhanced market transparency introduced by the Central Bank of Nigeria (CBN).
These factors have contributed to improved liquidity and confidence in the foreign exchange market, with the naira trading within a range of N1,660 to N1,525 per dollar in the official market and remaining stable at around N1,660 in the parallel market.
The stability in the naira has been largely attributed to the CBN’s implementation of the Electronic Foreign Exchange Matching System (EFEMS), which has improved transparency and efficiency in FX trading.
Charlie Robertson, Head of Macro Strategy at FIM Partners UK Ltd, noted that the naira’s performance may also be influenced by proceeds from Nigeria’s recent Eurobond issuance and the seasonal increase in dollar inflows from the diaspora.
Muda Yusuf, CEO of the Centre for the Promotion of Private Enterprise (CPPE), highlighted the transparency brought about by the EFEMS platform. He explained that clearer information on supply and demand has reduced information asymmetry and made demand more realistic. Yusuf also emphasised the importance of CBN interventions and rising external reserves, which have bolstered investor confidence and mitigated panic.
Aminu Gwadabe, President of the Association of Bureaux De Change of Nigeria (ABCON), observed that the naira’s appreciation was influenced by CBN interventions in the EFEMS market, and called for increased liquidity in the retail exchange market through Bureaux De Change (BDCs), so as to stabilise rates further. Gwadabe suggested leveraging BDCs as effective tools for managing volatility and achieving budgetary exchange rate targets.
Inflation
Inflation Rate in Nigeria increased to 34.60 per cent in November from 33.88 per cent in October of 2024.
Inflation Rate in Nigeria is expected to be 34.00 per cent by the end of this quarter, according to Trading Economics global macro models and analysts expectations
To tackle the pressing challenge of inflation, the CBN acted decisively by raising the Monetary Policy Rate by 875 basis points to 27.5 per cent in 2024.
While the Central Bank will continue to lay the foundation for price stability and foster a conducive policy environment, the role of banks in this journey is equally crucial.
An FX market defined solely by when and how the CBN buys or sells dollars is inadequate for the needs of a dynamic economy like Nigeria’s.
Now is the time for banks to step up to their intermediation and market-making responsibilities, providing customers with the right solutions to run their businesses and manage risks effectively.
CBN’s efforts to improve the functioning of our FX market yieded the desired impact in the review period. Average daily turnover in the Nigerian Autonomous Foreign Exchange Market increased by 226 per cent in the 1st half of the year when compared to the same period in 2023.
Foreign portfolio inflows increased by over 72 per cent during this period, while foreign exchange reserves have risen from $32 billion in May 2023 to over $40 billion. This represents the equivalent of eight months’ import cover and marks the highest reserves level in nearly three years.
The market has also supported over $9 billion in capital outflows over the past year as investors were able to freely repatriate capital and dividends without the need to wait for several months as experienced in the past.
These results reflect improved confidence in the reforms embarked on. In addition, there was a $6 billion current account surplus in the first half of 2024 as a result of the impact of these reforms.
Reduction in petroleum product imports supported by improved domestic refining capacity, a growing focus on non-oil exports and higher remittance inflows helped to support the positive current account balance.
Recapitalisation of banks
The CBN had on March, 28, 2024 announced a two-year bank recapitalisation exercise which commenced on April 1, 2024, and is expected to end on March 31, 2026.
The recapitalisation plan requires minimum capital of N500 billion, N200 billion, and N50 billion for Commercial Banks with International operations, National and Regional licenses respectively.
Cardoso said the recapitalisation policy not only strengthens financial stability but also serves as a catalyst for inclusive growth.
According to Cardoso, ongoing recapitalisation of banks was in line with CBN’s efforts to deepen financial inclusion, and support growth of key businesses.
He said: “This strategic move ensures that banks are well-capitalised, enabling them to take on greater risks, particularly in underserved markets. With stronger capital bases, banks can provide more loans and financial products to Micro Small and Medium Enterprises (MSMEs), rural communities, and other vulnerable segments that have previously struggled to access formal financial services”.
“By enabling banks to extend more credit to MSMEs, we enhance job creation and productivity. Furthermore, with increased capital, banks can invest in technology and innovation, which is crucial for driving digital financial services such as mobile money and agent banking. These technologies are key to breaking down geographic and economic barriers, bringing financial services to even the most remote areas,” he stated.
