Nigeria: Concerns Over Naira’s Fair Value After CBN’s $2 Billion Lifeline

The Central Bank of Nigeria (CBN) is refining its regulatory frameworks to address malpractices in the foreign exchange (FX) market, enhance transparency, and restore market confidence.

Last week, the CBN introduced two sets of regulatory guidelines aimed at consolidating the reforms initiated under the leadership of Yemi Cardoso, who has emphasized institution-building through regulatory frameworks since his appointment last year. Unlike the previous CBN Governor, Godwin Emefiele, who relied on demand management strategies, Cardoso has rolled out numerous regulations to strengthen market governance.

After injecting around $2 billion into the market to stabilize the naira and curb its depreciation, concerns remain about the currency’s persistent pressure against the U.S. dollar. Despite recent interventions, the naira continued to struggle, trading at N1,300 per dollar in March, N1,500 in August, and depreciating further through September. The naira has lost roughly 75% of its value over the past year, driven largely by inflation and growing FX demand.

On October 4, 2024, the naira experienced a brief recovery in the official Nigerian Foreign Exchange Market (NAFEM), appreciating by 1.69% to N1,631.21 per dollar. However, questions linger about the sustainability of this gain, especially as inflation and FX demand remain high.

As the Nigerian government plans to sell crude oil and petroleum products in naira, there is optimism that the pressure on FX reserves will ease, potentially stabilizing the exchange rate and reducing inflation. However, stakeholders argue that while the CBN has made efforts to strengthen regulatory frameworks, the gap between its intentions and policy execution remains wide, leaving market confidence in question.

The CBN has reportedly been holding stakeholder meetings with bank leaders to address these challenges and seek collaboration in promoting market transparency and curbing manipulation. While the banking industry has committed to working with the CBN, doubts remain about how the CBN will tackle entrenched fraud and corruption in the FX market without addressing broader moral risks within the financial system.

The CBN has introduced significant reforms, such as clearing FX backlogs, limiting forex for foreign education and medical tourism, raising minimum share capital requirements for Bureau de Change (BDC) operators, and curbing FX speculation. However, the effectiveness of these measures in stabilizing the naira remains uncertain.

A banking insider told The Guardian that the CBN may need to adopt stricter sanctions against market manipulation and introduce additional regulatory frameworks to address these challenges. Another source pointed to the loss of institutional memory within the CBN following the dismissal of key executives amid the prosecution of former governor Emefiele. This loss, they argue, has hindered the CBN’s ability to effectively combat insider trading and manipulation within the FX market.

Despite these setbacks, the CBN has gained independence from the past administration’s constraints, enabling it to take a more aggressive approach to regulatory reforms. Since the June 2023 market reforms that saw the naira plummet from N463 to nearly N1600 per dollar, the CBN has been issuing new regulations in its quest to stabilize the currency.

In September alone, the CBN sold $543.5 million at the NAFEM spot market to authorized dealers to boost liquidity. Earlier in August, it sold $876 million through a Retail Dutch Auction System (rDAS), and in July, another $106.5 million was injected into the market. Despite these interventions, the naira’s depreciation has persisted.

Omolara Duke, Director of CBN’s Financial Markets Department, reiterated the importance of spot sales as part of the broader FX management strategy. “The CBN will continue to facilitate the supply of FX into the Nigerian market to ensure stability and meet the country’s foreign exchange needs,” Duke said.

However, recent interventions have revealed the extent of fraud in the system. The naira traded at N1,604 to N1,670 in the spot market, while the CBN sold to banks at an average of N1,554.59, with much of the subsidized dollars being round-tripped or sold in the black market. The CBN also sold $63.32 million to 1,583 BDC operators in September, bringing the total dollar injection into the retail market to $606.82 million.

Cardoso’s team has rolled out additional guidelines aimed at restricting cash transactions, digitizing FX processes, liberalizing funding sources, and imposing new capital requirements for BDC operators. The new capital requirements—N2 billion for tier one and N500 million for tier two—have sparked concerns among operators, who claim the targets are unattainable within the six-month timeline.

The Association of Bureau De Change Operators of Nigeria (ABCON) has called for an extension of the recapitalization deadline, noting that the CBN has yet to address key issues, such as mergers and acquisitions frameworks and detailed guidelines. Dr. Aminu Gwadabe, ABCON President, expressed concerns that the new rules could lead to monopolization of the FX market and leave smaller operators struggling to meet the requirements.

BDC operators have long been associated with market speculation and manipulation, and experts argue that the CBN will need more sophisticated tools, real-time reporting systems, and improved manpower to effectively combat these issues. While the CBN appears to be overwhelmed by the challenges in the FX market, it continues to introduce new rules to increase transparency and governance.

Last week, the CBN launched the Electronic Foreign Exchange Matching System (EFEMS), designed to improve transparency and governance in the interbank FX market. The system will provide real-time visibility of transactions, reducing speculative activities and giving the CBN better oversight. A test run of the EFEMS platform is expected in November.

Additionally, the CBN introduced a draft Nigerian FX Code Book, which outlines ethical standards and principles for FX market transactions. The code, which will take effect on December 31, 2024, focuses on six guiding principles: ethics, governance, execution, information sharing, risk management and compliance, and settlement processes.

As stakeholders continue to review these new guidelines, some argue that beyond creating new rules, the CBN must work toward building an efficient market to resolve the naira’s ongoing challenges.