By Chisaa Okoye
Last week, the World Bank blamed Nigeria’s economic woes on the Central Bank of Nigeria’s unfavourable foreign exchange policies, which restricted access to FX, eroded investor confidence and investiment desire.
Specifically, the multilateral institution stated in a recent report that Godwin Emefiele – led CBN’s foreign exchange (FX) regime plunged Nigeria into the current FX crisis.
The naira fell as low as N505/$1 in the past few weeks at the parallel market. However, the local currency appreciated slightly against the United States Dollar at the black market on Friday, when it traded at N498/$1.
Analysts note that the CBN’s unfavourable FX policies are disincentives to investiment. The ‘bad’ FX policies, according to them are responsible for the current lull in investiments that can boost Nigeria’s foreign exchange earnings.
The CBN under Emefiele’s watch has been accused of deviating from its core mandates and carrying out functions that are purely the responsibilities of other government agencies and ministries and departments in the name of interventions that are not yielding results.
In its bi-annual Nigerian Development Updates, the World Bank urged Nigerian authorities to create the environment for a more predictable foreign exchange management system.
The World Bank noted: “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 barrage of foreign exchange measures put in place by Emefiele’s CBN, economic experts stated, have failed to spur investiments, resulting in the economic downturn being witnessed today.
Recently, the apex regulator announced the adoption of the Nafex rate as government’s official exchange rate for the naira, effectively devaluing the currency by 7.6 per cent. It also introduced a naira-for-dollar scheme to boost remittance inflows.
But the World Bank noted: that the two-month naira-for-dollars scheme was 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.”
The multilateral institution however expressed doubts that the incentive payments will increase remittances to the country.
Consequently, it called on the CBN to allow the I&E FX market function properly by allowing a more market-friendly approach for exchange rate transaction.
It said: “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.”
The World Bank further added: “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.”
In 2019, the CBN had unveiled what it tagged a Five Year Policy Thrust, which aims among others, to achieve domestic macroeconomic and financial stability; achieve a double-digit growth by the next five years, to bring down inflation to single digit while accelerating the rate of employment; to grow external reserves.
DECLINING EXTERNAL RESERVES
Analysts argue that the apex bank may not achieve these set targets given the economic outlooks and realities on ground.
Nigeria’s external reserves have been on the decline, falling to $34.24bn on May 28 from $34.88bn as of April 28. The reserves dropped by $640m in May.
The CBN said the decline reflected “sales to the foreign exchange market and third-party payments.”
In March, the reserves lost $178m after dropping from $34.99bn as of March 1 to $34.82bn as of the end of March 31.
In February, the reserves dropped by $1.1bn, falling from $36.19bn as of February 1 to $35.09bn on February 26.
The CBN said in January the drop was the consequence of the lower foreign exchange receipts.
SURGING INFLATION
Part of Emefiele’s five year policy thrust was to bring down inflation to single digit. But inflation has remained at near four-year highs with food prices skyrocketing.
The latest release from the National Bureau of Statistics put Nigeria’s inflation at 17.93% in May.
Although the inflation eased slightly for the second straight month in May, it remained at near four-year highs with food-price soaring more than 20% year-on-year.
The World Bank sees inflation at an average of 16.5% this year and remaining above the 9% top of the target band until at least 2023.
While noting that the surging inflation is undermining the recovery of the Nigerian economy, pushing 7 million Nigerians into poverty, the World Bank disapproved the CBN’s position that the high inflation stems primarily from supply constraints. The multilateral institution said tight exchange-rate controls and expansive monetary policy are key drivers of price growth.
“Policy decisions related to the exchange rate, trade, and monetary and fiscal factors are driving inflation, especially during 2021, more so than exogenous factors related to conflict and weather shocks,” said Marco Hernandez, the World Bank’s chief economist for the country.
CBN Defensive Attitude
Rather than heed calls for a more favourable FX policies that will rejig the Nigerian economy, the CBN appears more concerned with justifying its actions.
The CBN’s overprotective mentality was evident when a few years ago, its media team rose against genuine calls by experts and the World Bank to address the FX problems, describing the calls as “unwarranted attacks on its policies by a group of Nigerians, whose real interests are self-serving and unpatriotic.”
“The self-centered individuals, who have failed to assail our patriotic position, have resorted to the sponsorship of serial propaganda to misinform and mislead the public on the objectives of our policies.
“Intelligence reports at the disposal of the bank reveal the involvement of some unpatriotic elements funding the push to have the CBN and the Federal Government reverse its forex policy, which is aimed at conserving foreign exchange, stimulating agriculture and manufacturing and also promoting exports”, CBN said in the wake of the demand for a favourable exchange rate and call for naira devaluation to stabilise the economy.