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Analysts are of the consensus that Nigeria’s new central bank governor, Olayemi Michael Cardoso must act fast to restore confidence to the nations battered naira, after the currency weakened to a record low against the dollar.
The naira has fallen to the psychologically important threshold of 1,000 per dollar on the parallel market from 970 just last week.
The Senate on Tuesday, September 26 confirmed the nomination of Cardoso as Central Bank of Nigeria (CBN) governor.
The Senate also confirmed the nomination of Mrs. Emem Usoro, Mr. Muhammad Sani Abdullahi Dattijo, Mr. Philip Ikeazor and Dr. Bala M. Bello, for appointment as Deputy Governors of the Central Bank.
The parallel-market rate is now about 29% weaker than the official exchange rate of 775.37 per dollar.
The two rates briefly converged soon after newly elected President Bola Tinubu announced sweeping currency reforms in June, but they’ve diverged steadily since then as dollar supply from the central bank fell short.
CBN will have to hike rates – Gadio
Restoring confidence in the NGN is likely to be the top priority as the parallel rate hits 1000, according to Samir Gadio, Head, Africa Strategy, FX, Rates and Credit Research at Standard Chartered Bank.
This may however prove challenging because of the perception that the CBN’s ability to provide USD liquidity is constrained, Gadio told MoneyCentral.
“The key test will likely be whether the CBN allows more FX volatility and flexibility in USD-NGN price discovery in the formal market.
“Fixed-income rates will probably need to move significantly higher to slow or partly reverse onshore dollarisation and eventually attract some portfolio inflows. With Eurobond yields in low double digits, short-dated onshore rates in a 20-25% range may be required for the risk-reward of local debt to improve,” Gadio said.
“But keeping rates attractive may not be that easy as the CBN has historically battled structural excess liquidity. While punitive cash reserve ratio (CRRs) on the loan to deposit (LDR) shortfall could help mop up liquidity, this may not prove sufficient to sustainably anchor elevated yields. The issuance of OMO bills or the removal of the SDF cap per bank could be additional tools, but they would come at a material cost and may not be the preferred avenue from a policy standpoint.”
CBN must audit FX backlogs, boost Chinese swaps – Rasaq
Abiola Rasaq, economist and former Head Investor Relations for United Bank for Africa (UBA), told MoneyCentral that Cardoso should audit foreign exchange (FX) backlog demand from airlines, foreign portfolio investors (FPIs) and major manufacturers, and clear all the backlog, even if he has to deplete reserve and announce the true position.
“He should audit the banks’ FCY positions as well as and take a hard stance on any erring bank, irrespective of the affiliation. He should sign a swap deal with Bank of China and identify all major imports from China and stop FX supplies to importers of those items, rather let the banks trade Chinese Yuan just as they do for USD, leveraging the swap deal it must have entered with Bank of China.”
Rasaq added that the new CBN governor should cancel all Bureau De Change (BDC) licenses and let all banks sell FX, license only few BDCs which they can monitor not the several thousands operating now, and take a law to the National Assembly that criminalizes illegal sale of currencies without license, just like you have in most developed countries.
“Stop all those nonsense Nigeria Incentive-Based Risk Sharing system for Agricultural Lending (NIRSAL) and all sorts of loans they are issuing directly. Redirect all development Finance loans through Development Bank of Nigeria (DBN), Bank of Industry (BOI), Bank of Agriculture (BOA), Bank of Infrastructure and InfraCo…that is not CBN’s job…it has turned to racketeering there,” Rasaq said.
In a bid to bring a halt to the incessant slide in the value of the Naira against the greenback, two viable options can be explored by the authorities.
Work with fiscal authorities, executive to explore IMF program – Ologunro
Efforts should be geared towards ramping crude oil production to enhance the trickle down impact of strong oil prices on FX reserves, according to Gbolahan Ologunro, Portfolio Manager, FBNQuest Asset Management.
“It goes without saying that the overall positive impact would be partly offset by fuel subsidies. Secondly, together with the fiscal authority an International Monetary Fund (IMF) program can be explored to obtain conditional long term financing that will ease balance of payments (BOP) difficulties in the short term whilst providing leeway for the continued implementation of reforms that will improve the fiscal position over the medium term,” Ologunro said.
“It is pertinent to highlight that the country is in a much better position of getting a nod from the Bretton woods institution given the implementation of long awaited policy reforms in the downstream oil and gas sector alongside improved clarity in the FX framework.”
CBN should hike interest rates to push real rates positive – Rewane
Renowned economist, Bismarck Rewane, says the CBN should ensure that the interest rate is close to the rate of inflation so that there will be equilibrium.
He says the naira would appreciate again but added that this might not happen until the early parts of 2024.
According to the economist, Nigeria needs to spend big on projects that increase productivity, block leakages, and encourage people to invest.
“You got to stop state capture, you can’t have oligarchs and barriers to entry. So, this economy must be freed from the oligarch’s interest. An oligarch interest means state capture, shifting state resources to private pockets and leading to inefficiencies,” Rewane said.
“You must allow the market to determine pricing. By reducing subsidy on petroleum products, and reducing subsidy in exchange rates.”