In response to the persistent imbalances observed in Nigeria’s foreign exchange market, the Central Bank of Nigeria (CBN) has initiated proactive steps to bridge the widening gap in exchange rates by supplying Bureau De Change (BDC) operators with dollars daily.

In a recent circular signed by Dr. Hassan Mahmud, the Director of the Trade & Exchange Department, the CBN announced its decision to allocate $20,000 to eligible Bureau De Change (BDC) operators across the nation.

The move is part of a comprehensive strategy aimed at achieving a more market-driven exchange rate for the Naira while mitigating pressures on the parallel market.

Under the directive, the allocated funds will be sold to BDCs at a fixed rate of N1,301/$, mirroring the lower band rate of executed spot transactions at the Nigerian Autonomous Foreign Exchange Market (NAFEM) as of the previous trading day, dated February 27, 2024. This strategic intervention is anticipated to infuse much-needed liquidity into the market, thus stabilizing the Naira’s value.

Additionally, the circular delineates specific guidelines for BDC operators, limiting their margin on foreign exchange sales to end-users to not more than one percent (1%) above the purchase rate from the CBN. This measure aims to curb excessive mark-ups and safeguard consumers from price exploitation.

“The CBN has approved the sale of foreign exchange to eligible BDCs to meet the demand for invisible transactions. The sum of $20,000 is to be sold to each BDC at the rate of N1,301/$—(representing the lower band rate of executed spot transactions at NAFEM for the previous trading day, as at today, 27th February 2024),” the circular highlights. “All BDCs are allowed to sell to end-users at a margin NOT MORE THAN one percent (1%) above the purchase rate from CBN.”

Furthermore, eligible BDCs are required to deposit their Naira payments into designated CBN Foreign Currency Deposit Naira Accounts and furnish confirmation of payment along with other requisite documentation for disbursement at select CBN branches in Abuja, Awka, Lagos, and Kano.

This strategic move by the CBN is aimed at enhancing the efficiency and transparency of the foreign exchange market, fostering a conducive environment for Naira trading. By directly addressing distortions in the retail market, the CBN seeks to promote economic stability and growth.

In addition to these measures, the CBN has implemented various reforms to counter Naira depreciation, including the resolution of FX backlogs, restrictions on forex for foreign education and medical tourism, augmentation of BDCs’ minimum share capital, and measures to deter FX speculation. The central bank said on Tuesday it has cleared an additional $400 million in the nation’s FX obligations, leaving outstanding of about $4 billion.

However, the efforts have failed to tackle the prevailing foreign exchange challenges, which have contributed significantly to the mounting inflation rates in the country. With the nation’s headline inflation at 29.90%, the CBN increased the interest rate once again, to 22.75%, following the Monetary Policy Committee meeting which was concluded on Tuesday.

Consequently, this fresh move by the CBN to supply BDCs with dollars has come with skepticism due to insufficient liquidity of forex. Though the CBN governor Yemi Cardoso said on Tuesday that the Nigerian foreign reserve, from where it is expected to sustain the supply of FX to the BDCs and banks, has risen to $34 billion, there is concern that the recent increase in the fund will not be sustained. This is because of the continuous decline in the nation’s oil output, attributed to oil theft and vandalism of oil installations.

The naira closed at N1,615.94 per dollar in the official (NAFEM) market and N1,630 in the parallel market on Tuesday.

Amidst mounting concerns over Nigeria’s economic stability, particularly the persistent rise in inflation, the Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN) convened its inaugural meeting for the year on February 26th and 27th, 2024.

The committee, comprised of twelve members, deliberated on the necessary steps to address the prevailing economic challenges and announced several key decisions aimed at tightening monetary policy.

The decisions are as follows:

Monetary Policy Rate (MPR) Increase: The committee opted to raise the Monetary Policy Rate by 400 basis points, pushing it to 22.75 percent from its previous level of 18.75 percent.

Adjustment of Asymmetric Corridor: The MPC adjusted the asymmetric corridor around the MPR to +100/-700 basis points from +100/-300 basis points.

Increase in Cash Reserve Ratio (CRR): The Cash Reserve Ratio was elevated from 32.5 percent to 45.0 percent.

Retention of Liquidity Ratio: The Liquidity Ratio was retained at 30 percent.

These decisions were motivated by the prevailing inflationary pressures, exchange rate instability, and projections of future inflation trends. The Committee expressed deep concern over the sustained upward trajectory of inflation and emphasized its commitment to curbing this trend.

While acknowledging the trade-off between promoting output growth and combating inflation, the MPC stressed the importance of maintaining low and stable inflation for sustainable economic expansion.

The transition to an inflation-targeting framework was deemed crucial in addressing inflationary pressures, with the committee commending the fiscal authorities for their support in this regard. The committee weighed the options of maintaining the status quo or increasing the policy rate to counter inflationary pressures, ultimately opting for the latter.

Headline inflation surged to 29.90 percent in January 2024, up from 28.92 percent in December 2023, driven by increases in food and core inflation. Factors contributing to inflationary pressures included exchange rate pass-through, escalating energy costs, high fiscal deficits, and security challenges in key food-producing regions. Additionally, global factors such as tight financial conditions and geopolitical tensions posed significant upside risks to domestic inflation.

Despite inflationary concerns, the Nigerian economy exhibited modest growth, with real GDP expanding by 3.46 percent in Q4 2023, driven by improvements in both the oil and non-oil sectors. Projections for 2024 indicated varying growth forecasts by different entities, with the CBN forecasting growth at 3.38 percent, the Federal Government of Nigeria (FGN) at 3.88 percent, and the International Monetary Fund (IMF) at 3.00 percent.

The CBN said on the external front, gross external reserves witnessed an increase to US$34.51 billion as of February 20, 2024, compared to US$32.23 billion at the end of January 2024. This improvement was attributed to reforms in the foreign exchange market and an uptick in oil production, among other factors.

While the MPC’s decision to raise the MPR was applauded by experts, concerns were raised regarding the elevated Cash Reserve Ratio and liquidity ratio.

Financial analyst Kelvin Emmanuel noted that Nigeria’s CRR, currently at 45 percent, significantly surpasses the global benchmark average of 15 percent recommended by the Bank for International Settlements. He warned of potential challenges for banks, including increased non-performing loan ratios, amidst efforts to meet regulatory requirements and improve asset quality.

“Asking the banks to park 45% of all deposits with a quick, current, and operating cash flow ratio at 30% in the same year where you want them to recapitalize their minimum capital requirement and improve their asset quality is quite the stretch. The weighted Non-performing loan book average will definitely rise above 7%,” he said.