The World Bank has blamed the Central Bank of Nigeria’s management of the foreign exchange regime as the reason for the FX crisis currently being experienced in the country.
The World Bank made this remark in its bi-annual Nigerian Development Update, a report published twice yearly. According to the World Bank, the central bank’s management of the exchange rate reduced supply in the market thus affecting investor confidence and ultimately leading to a ditch of the official market for the black market.
“The way the exchange rate was managed limited access to FX and thus adversely affected investor confidence and investment appetite,” the World Bank stated.
The disparity between the official I&E Foreign Exchange Window (IEFX) and the parallel market has widened to as high as N90 in recent weeks due to a combination of speculation, demand and fear of future devaluation of the currency.
“Significant spreads between the official, the IEFX, and the parallel exchange rate persisted throughout 2020 and as of April 2021, the spread between the official and the IEFX rate was estimated at 8% and between the IEFX and the parallel rate, reached 18% (the spread between the official and the parallel rate was 27%),” the World Bank added.
The CBN recently made its biggest move yet in unifying the exchange rate after it dumped its long-held official rate for the IEFX rate published by the FMDQOTC. In addition, it recently also extended the Cash4Dollar scheme introduced back in March hoping this will drive more diaspora inflows into the banking system.
Despite these moves, most critics believe it has come late and may have been avoided, had the central bank been more pragmatic. The World Bank also blamed the apex bank for not going all in with its change in policies.
“In May 2021, the CBN formally took concrete steps towards rates unification between the official and IEFX rates. However, the IEFX rate continues to be managed and is not fully reflective of market forces. Furthermore, there remains a 20 percent premium between this unified rate and the parallel market rate. The two-month naira-for-dollars scheme introduced by the CBN in March 2021 to serve as an incentive for increased remittance inflows through formal channels was extended indefinitely in May and was preceded by regulatory directives in December 2020—that mandated all licensed operators to pay remittances in dollars. While this may indeed encourage the use of the formal channels, it is not clear that incentive payments will increase remittances to the country,” the World Bank stated.
The World Bank also made recommendations of what the central bank should do to address the issues of forex shortages and exchange rate disparity. It called on the CBN to allow the IEFX market function as it should by allowing a more market-friendly approach for exchange rate transaction. Rather than allow an unreliable way of reporting exchange rate prices, it called for a two-way quote which allows banks to quote for their bid and offer prices just the way it is done in the stock market.
It also called for higher participation of oil companies in providing FX supplies, believing this will be achieved if the market is more transparent and flexible. The World Bank believes a return to a flexible exchange rate regime (post-2015 and pre-2020) will allow for limited interventions by the CBN.
The World Bank recommends that “While the CBN has taken steps towards operationalizing unification of exchange rates, greater flexibility will be necessary to support the recovery. Until oil companies are allowed to sell FX receipts to IEFX bank participants, CBN would still have an important role to play as supplier of FX. In this scenario, participating banks in the FX market will start to play an expanded role that goes beyond just executing buy/sell orders of its clients to start acting as market makers, meaning that they start to quote two-way prices buying and selling on its own behalf and carrying a stock of FX. With increased flexibility, the CBN could start intervening only to smooth large fluctuations and work toward ensuring a single, market-driven rate. Keeping market stakeholders fully informed of such efforts would help attract both domestic and foreign investment. The right mix of exchange-rate flexibility and expanded supply (e.g., through banks and FX agents) would enable the FX market to efficiently allocate resources, which would allow the CBN to focus its interventions on smoothing large and disruptive FX fluctuations.”
Seems so reasonable in theory however a Central bank with limited tools and room for manoeuvre is unlikely to want to play less of a role. That seems rather counter intuitive. The CBN has probably banked on improving the countries BOP first to ensure it actually has the tools to play an interventionist role in the FMX market.
The CBN governor certainly feels that the coming online of the Dangote refinery and its net effect on its forex supply will allow it play this role promoted by the World Bank.
Nigeria is also not ready for shock tactics, you might brake something irreparably from the impact.
CBN is aware of the solution as provided by world bank. But, with Naira exchange! There is more to CBN actions and inactions than meets the eye.
The CBN is regarded as the bankers bank and indeed it’s regulatory role is that of monetary supervision and policy . BOFIA Act 2007 empowers the CBN to do that. However, in doing this the CBN has the power to control liquidity in a bid to correct inflation because in recent times inflation is said to be on the high in the economy and if this is the situation liquidity in circulation wether it’s local or foreign currency ought to be firmly checked but not to a fault and outrightly the writer is not alluding to that. The CBN at the last MPC Meeting took into account several variables before bench- marking the economy which I think in the long run would favour the economy, foreign inflow and forex accessibility. Take into account our foreign and local commitments to investors, lenders and businesses within and outside of our shores which consistently has continued to run seamlessly, it’s only a matter of time for the economy to bounce back with time. Yes, the concern of the world Bank is genuine as a global watch- dog but should be exercised cautiously and genuinely as it’s done to achieve investor confidence and inflow . What I expect the IMF to do is to continue to work closely with the CBN in attaining a sound, virile and viable forex accessibility, cash inflow and outflow for the betterment of even smaller micro- businesses which have to grow in an emerging economy like our which competes favourably with other businesses. Another angle is that the CBN doesn’t do all that in isolation because the MPC carries along the private sector, trade unions, traders, business men of vigour and valour and of course the government . It’s only a matter of time for the the gray areas to clear and for the dust to settle.
In my opinion, the CBN should float the naira because prices of goods and services in the country already reflect black market rates. This implies that even the few organisations who get the official rate for their imports are not transmitting same to the market. If the CBN must intervene, then I suggest that only basic utility related imports like fuel and power generation should be given lower rates in order to check inflation. But for all other purposes, the market rate should prevail irrespective of the status and size of the applicant.
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Insecurity in the is also responsible for free fall of Naira in the FX market as investors are not willing to bring their money thereby resulting into short supply of dollars and other foreign currencies in the FX market. Buy and large the CBN should rejig it’s FX supply policy.
PMS (fuel) import consumes most of the foreign Exchange earned from sell of crude oil. It is wise to have sales depot for crude for any local refiner of crude oil to buy from there. A policy like this will enable the setup of multiple micro refineries, who will buy crude oil and refine diesel, kerosene, etc.
Let DPR stop over regulation of these industry as if we don’t need it. Selling part of the crude for local consumption will not affect our export earnings. If this is done we will use earned forex to fund other imports and supply will drive dawn exchange rate.