From Adanna Nnamani, Abuja
Since the current Central Bank of Nigeria (CBN) Governor, Dr Yemi Cardoso assumed office, he has carefully rolled out a number of intervention programmes and mapped out new policy paths to pull the economy back from the cliff to more stable grounds.
Some other reforms kicked off last year when President Bola Tinubu announced an end to the petrol subsidy regime.
On June 14, 2023, the apex bank implementedsome changes to stabilise the financial market.
Naira float
The CBN has floated the local currency-naira and announced a unified foreign exchange (FX) rate; thereby, channeling every request for FX to the Investors & Exporters (I&E) window.
Nigeria operates four foreign exchange (FX) markets; the Interbank FX market, the Investors and Exporters (I&E) window, Bureau De Change (BDC) window and the Small and Medium Enterprises (SME) window.But under the new arrangement, all the four have collapsed into the I&E Window, as market forces of demand and supply, not CBN’s interventions, will henceforth determine the true value of the naira. This move aligns with President Bola Ahmed Tinubu’s plan to urgently remodel the nation’s monetary policy structure and carry out some “house cleaning”.
However, the debate around defending or floating the naira has been a long one among finacial experts.
Former President Muhammadu Buhari, in his eight-year tenure, fought to defend the naira.
The situation turned clearly unsustainable following Nigeria’s upheaval during the 2016 global oil crisis, prompting the implementation of multiple exchange rates to protect the naira from significant devaluation, a move that President Tinubu disapproves of.
The new president believes that a unified interest rate will attract offshore and local investors, especially as the country struggles to fund many developmental projects, including the national development plan of N340 trillion, out of which the federal government will only provide a capital of N50 trillion (15 per cent of the facility).
Willing buyer, willing seller FX model
There has also been the re-introduction of the “Willing Buyer, Willing Seller” model at the 1&E Window of the FX market where an entity with demand for FX seeks out another entity with FX to sell at a mutually-agreed price through an authorised dealer.
Operations in this window, according to the CBN, shall be guided by the extant circular on the establishment of the window, dated 21 April 2017.
Here, all eligible transactions are permitted to access foreign exchange at this window.
Under the new arrangement, the operational rate for all government-related transactions would be the weighted average rate of the preceding day’s executed transactions at the I&E window, calculated to two decimal places. Simply put, it is a summation of volume of FX traded multiplied by the various rates at which the deals are consummated, divided by total volume of trade.
Reduction of Banks’ LDR to 50%
The CBN recently announced a reduction in the Loan-to-Deposit Ratio (LDR) of banks in the country from 65 per cent to 50 per cent.
The LDR is used to assess a bank’s liquidity by comparing a bank’s total loans to its total deposits within the same period.
The adjustment, reflecting the recent increase in the Cash Reserve Ratio (CRR) for banks, aims to align the LDR policy with the current monetary tightening measures (increasing interest rate) undertaken by the CBN.
In a nutshell, an increase in the loan-to-deposit ratio allows banks to expand their credits to businesses and individuals, however, a decline in LDR reduces their ability to loan customers from depositors’ funds.
On February 2, the CBN said it would stop daily cash reserve ratio (CRR) debits of deposits in commercial banks.
CRR is one of the monetary policy tools the CBN uses to limit the circulation of money or supply in the economy as the bank’s liquidity drops.
At the last monetary policy committee (MPC) meeting on March 26, the CBN retained the CRR at 45 percent and the liquidity rate at 30 percent.
The monetary policy rate (MPR) (lending rate) was raised by 200 basis points to 24.75 percent.
Addressing banks’ Net Open Position (NOP)
The CBN recently noted with concern, the growth in foreign currency exposures in banks through their Net Open Position (NOP). In a simple explanation, the apex bank believes some commercial banks hold long-term positions in forex with the hope of profiting from it especially when there are forex fluctuations.
For example, a bank borrows or buys $1 million worth of forex but then holds half of it in its position instead of lending it or using it to finance purchases for its clients immediately.
What this means is that banks can profit from currency depreciation if they buy the forex low and sell high.
This practice, known as speculation, involves buying or holding foreign currencies in the hope of profiting from fluctuations in exchange rates. However, this behavior can expose banks to significant risks, including exchange rate volatility and potential financial losses.
The NOP measures the difference between a bank’s foreign currency assets (what it owns in foreign currencies) and its foreign currency liabilities (what it owes in foreign currencies).
The circular mandates that the NOP must not exceed 20% short (owning more than owning) or 0% long (owning no more than the bank’s shareholder funds not reduced by losses) of the bank’s shareholders’ funds.
Ending usage of FX as collateral for loans
On 8 April, the CBN directed all banks in Nigeria to stop the use of foreign currencies as collateral for naira loans within 90 days. Due to the CBN’s regulations, schools, hospitals, hotels, supermarkets, property agents, etc., can no longer ask their customers to make payments in dollars, except those who are visiting Nigeria. Since Cardoso initiated the robust inter-agency cooperation with the Economic and Financial Crimes Commission (EFCC), the Office of the National Security Adviser (ONSA) and other strategic stakeholders, security agencies have been arresting those culpable of violations among the BDC operators.
Non-restriction of deposits into domiciliary accounts
Again, the CBN says deposits into domiciliary accounts will not be restricted, and customers “shall have unfettered and unrestricted access to funds in their accounts”.
Proscription of trading limits
Proscription of trading limits on oversold FX positions with permission to hedge short positions with Over-the-counter (OTC) futures.
OTC markets allow investors to buy and sell securities that are not available on major stock exchanges. Instead of buying on a public exchange, transactions occur directly between a network of broker-dealers and market makers.
“Limits on overbought positions shall be zero. Re-introduction of order-based two-way quotes, with bid-ask spread of N1. All transactions shall be cleared by a Central CounterParty (CCP).
Reintroduction of Order Book
This was done to ensure transparency of orders and seamless execution of trades.
The primary difference between order book and trade book is that the order book is a reflection of all the orders that have been placed while the trade book is a reflection of the trades that have actually been executed.
Cessation of RT rebate scheme
There is also a cessation of RT200 Rebate Scheme and the Naira4Dollar Remittance Scheme, with effect from 30 June 2023.
Under the scheme, a rebate of N65 for every $1 of repatriated non-oil export proceeds is paid to exporters of semi-finished and finished goods, while exporters of unprocessed items enjoy a rebate of N25/$.
Launched in 2022, the Race to $200 billion in FX Repatriation (RT200FX) initiative was established to stimulate non-oil exports with a $200 billion FX income target in the next three to five years.