The World Bank has urged the Central Bank of Nigeria (CBN) to abandon its current practice of conducting foreign exchange auctions and to adopt a more flexible exchange rate strategy. This recommendation stems from the broader recognition that Nigeria’s economy requires transformative reforms to ensure sustainable growth and stability.
With the recent caution from Professor Attahiru Jega, former Chairman of the Independent National Electoral Commission (INEC), this serves as a vital reminder for Nigeria as it routes the complex terrain of economic policy formulation. His call for discernment in following the recommendations of Bretton Woods institutions like the World Bank and the International Monetary Fund (IMF) mirrors a growing sentiment that, while external advice can be valuable, it should not be adopted without extensive consideration of the unique challenges faced by Nigeria.
During the week under review, the system experienced a surplus of liquidity throughout, marking a significant turnaround from previous weeks, which were characterised by persistent liquidity deficits. This change was primarily driven by a Primary Market repayment of ₦260.67 billion on Monday and an OMO repayment of ₦254.25 billion on Tuesday. At the NAFEM Window, the exchange rate traded at a high of $/N1,690.00 on Tuesday, and at a low of $/N1,575.00 on Wednesday. The market closed the week at $/N1666.72 on Friday.
Recall that some weeks ago, Indermit Gill, the World Bank’s Chief Economist, emphasised the necessity for a steadfast commitment to reform over a prolonged period, highlighting that it could take as long as 15 years for the benefits of these changes to materialise. However, the immediate shift towards a flexible exchange rate system is a critical step with the potential benefits of a flexible exchange rate for Nigeria, including attracting foreign investment and stabilising the Naira. Some in support argue that this approach could enhance economic growth by aligning the currency’s value with market dynamics. Nonetheless, critics caution that without a strong local production base, such a shift might worsen inflation and reduce purchasing power due to higher import costs, as seen recently in Nigeria.
The current situation, where the exchange rate is nearing a staggering $/N2,000, stresses the urgent need for reform. By transitioning to a flexible exchange rate system, the CBN would, and is expected to establish clear and transparent rules for currency transactions, thereby reducing uncertainty and building confidence among investors and market participants. This approach would allow the Naira to respond more dynamically to market conditions.
For the CBN, embracing this recommendation means re-evaluating its monetary policy framework. A flexible exchange rate could provide the central bank with greater room to focus on controlling inflation and stabilising the economy rather than solely managing currency rates. Such a shift would need to ensure that the markets understand the new framework, thus promoting trust and participation in the foreign exchange market.
From the government’s perspective, this move aligns with broader economic reforms aimed at diversifying the economy and attracting foreign investment. By allowing the Naira to find its true value in an open market, the government could stimulate economic activities and enhance the competitive environment for local businesses. This would encourage innovation and growth, particularly in sectors that have been choked by currency volatility and uncertainty.
Also, there is a need for fiscal commitment to diversify the economy and put necessary infrastructure in place to support a liberal market. At this time, critical industries need to be supported so life does not get harder for the average Nigerian already affected by the liberalisation of the foreign exchange market.
Moreso, the broader economy stands to benefit immensely from a strengthened Naira. A stable and predictable currency would create an environment conducive to investment, both local and foreign, and would reduce the cost of doing business in Nigeria. Furthermore, with a flexible exchange rate, the financial markets could flourish as increased liquidity and transparency would attract more participants. Investors would have greater confidence in their ability to manage currency risk, making Nigeria an appealing destination for capital inflows.
However, going by the caution from Professor Jega, in a nation where economic decisions can have profound implications for the livelihoods of millions, it is crucial for Nigerian leaders to take a critical approach to these recommendations. This means thoroughly assessing how such policies align with the specific economic, social, and cultural contexts of Nigeria. Rather than simply implementing directives directly from international agencies, the government should engage in comprehensive analyses that weigh potential outcomes against the well-being of its citizens.
Nigerian leaders must carefully consider the short- and long-term ramifications of these policies, ensuring that any measures taken do not exacerbate existing inequalities or hinder the country’s development goals. With the practice of good governance, strengthening institutions, promoting transparency, and enhancing accountability are foundational elements that will enable Nigeria to effectively manage external recommendations posed by external pressures while safeguarding the interests of its citizens.
Engaging with local stakeholders, including civil society, the private sector, and community leaders, is also essential. Such collaboration can provide instrumental insights into the specific needs and aspirations of the populace, allowing for more tailored and effective policy responses. This participatory approach not only enhances the legitimacy of government actions, but also cultivates a sense of ownership among citizens, which is vital for sustainable development.
Although liquidity continues to play a major role in the local markets, the inflationary pressures and FX trends will certainly guide trading appetite across the fixed income curve. The CBN is expected to curb interbank liquidity by posting CRR debits or floating an OMO. Bond yields in particular are expected to trade within tighter bands this week.
As the U.S. Presidential elections approach amidst escalating conflict in the Middle East, electoral dynamics are likely to impact greatly on equity, fixed income, cryptocurrency, and commodity markets, all interconnected through political decisions and global economic reactions.
The conflict’s escalation may lead to increased volatility in fixed income markets as investors react to geopolitical uncertainties. In the oil markets, traders are likely to be significantly affected by developments in the Middle East. As tensions rise between Israel and Iran, further fears of supply disruptions could lead to spikes in oil prices. Generally, conflicts in this region have resulted in immediate reactions in oil markets due to concerns over supply security and geopolitical stability.
