A recent analysis by the Standard Bank Group has revealed that the Central Bank of Nigeria (CBN) is poised to address its significant foreign currency obligations by leveraging funds derived from a recent collaboration between the Federal Government of Nigeria and the Nigerian National Petroleum Company Limited (NNPCL). This development is expected to play a crucial role in alleviating the forex crisis that has plagued Nigeria, with the CBN adopting a strategic approach to gradually eliminate a substantial FX backlog exceeding $10 billion.
The financial group’s African Markets Revealed report, presented to the media on Thursday, provides an insightful forecast not only for Nigeria but also for 17 other key African countries. The researchers delve into the complexities of the macroeconomic challenges facing Nigeria and express optimism regarding a tripartite agreement involving the Federal Government, NNPC Limited, and the African Export-Import Bank (AFREXIM). This collaborative effort is seen as a pivotal step in gradually addressing the massive FX backlog, potentially exceeding $10 billion.
Critical moves by the apex bank boost investor confidence.
It is believed that the successful clearance of this substantial backlog could have far-reaching implications, not only in stabilizing the Nigerian naira but also in instilling confidence among investors in a currency that has witnessed a depreciation of more than 65 percent since President Bola Ahmed Tinubu harmonized the FX market. The report suggests that the CBN, armed with funds from the Federal Government and NNPC capital raises, is poised to systematically clear its foreign currency obligations, thereby shifting FX liabilities away from the central bank.
This strategic move is expected to free up FX reserves, enabling the CBN to actively support the forex market and foster increased investor confidence. The researchers anticipate that, with the successful resolution of the FX backlog, the naira could strengthen to an exchange rate of ₦1,171 per USD at the official market by December this year. “We see the USD/NGN pair at 1,171 by Dec 24 in the official market,” the report states. “The CBN is likely to keep gradually clearing its foreign currency obligations with funds from the FGN and NNPC capital raises, shifting FX liabilities away from the CBN, which would liberate FX reserves to support the market and foster investor confidence.”
Reforms drive stability, inflation battle continues.
Also, the researchers commend the Central Bank of Nigeria (CBN) for implementing substantial reforms aimed at rectifying market abnormalities. These reforms include the elimination of multiple FX windows, termination of the RT200 rebate and Naira4Dollar scheme, lifting FX restrictions on 43 prohibited imported goods, and addressing outstanding FX obligations. Their analysis underscores the positive impact of these changes on the overall stability of the market, signaling a commitment to creating a more transparent and efficient foreign exchange system in Nigeria.
Despite these positive steps, fighting inflation remains a key objective for the CBN. The report notes that foreign investors and analysts are growing impatient with the CBN Governor’s reliance on punitive bank rules and interest rate hikes to curb inflation. In response to this, researchers from the financial group observe that the CBN is adopting alternative tools such as the Standing Deposit Facility (SDF), ad hoc Cash Reserve Ratio (CRR) debits, and Open Market Operations (OMO) sales to address liquidity concerns amidst inflation rates surpassing 25 percent.
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In all, the researchers express a strong belief that the CBN’s current management will persist in utilizing SDF, CRR, and OMO to manage liquidity and address inflation throughout 2024. The report emphasizes the importance of confidence in CBN reserves returning to the market, anticipating a gradual improvement in foreign private sector inflows as a result. The strategic approach outlined by the CBN, combined with ongoing reforms, paints a positive picture for Nigeria’s economic landscape, with the potential to attract much-needed foreign direct investment in the coming months.
Central Bank of Nigeria: Website