The World Bank has advised the Central Bank of Nigeria (CBN) to refrain from intervening in the foreign exchange market through forex auctions.
The Bretton Woods Institution also advised the CBN to continuously reaffirm the commitment to exchange rate flexibility by adopting a comprehensive, systematic, and transparent framework for foreign exchange interventions.
The World Bank policy advisory was included in the Nigeria Development Update, offering recommendations to stabilize the naira against foreign currencies.
The CBN had auctioned $876.26m to end users via a retail Dutch auction on August 26, 2024, a major move away from its traditional sales of foreign exchange to Bureau De Change operators.
This auction marked one of the most significant FX interventions by the CBN under the leadership of Governor Yemi Cardoso, who has been actively working to stabilize the naira and address the ongoing volatility in the FX market.
The apex bank said the auction process was to enhance foreign exchange liquidity in the market, alleviate demand pressure, and support price discovery in alignment with its objectives.
According to the sales report, 3,347 firms got access to the dollars via the 26 banks, which qualified at the rate of N1,495 per dollar cut-off rate.
But the Bretton Woods Institution in its latest report noted that permitting market participants to trade FX with more flexibility across time would also contribute to deepening the FX market.
The report read, “Exchange rate policy should continue to be geared towards maintaining a unified, market reflective exchange rate, whilst deepening the FX market. The CBN should continue efforts towards deepening the official FX market, including by facilitating formal remittances inflows, allowing international oil companies to fully concentrate their FX sales in the official market, restoring intermediated market access to bureaux de change, and refraining from ad-hoc FX auctions.
“Allowing market participants to trade FX with more flexibility across time would also contribute to deepening the FX market.”
Also, the bank noted that there should be efforts to build foreign reserves strategically in order to more accurately determine the fair value of the naira against foreign currencies, ensuring a stable and predictable economic environment that supports both domestic and international trade.
It said, “In addition, continuously reaffirming the commitment to exchange rate flexibility, adopting a comprehensive, systematic, and transparent framework for CBN FX interventions, and building reserves would contribute to anchoring exchange rate expectations to fundamentals rather than to perceived targeted rate levels.
”Maintaining the single, market-reflective exchange rate is crucial to increase fiscal revenues (from oil and taxes on other export-related profits, customs, and VAT on imports), attract investment, build external reserves, and, in turn, set the conditions for investment and inclusive growth.”
However, it remains to be seen if the apex bank will adhere to the recommendations.
At the IMF/Worlds Bank annual meeting in Washington DC, the United States, the Minister of Finance and the coordinating minister of the economy, Wale Edun, said the government hasn’t followed all of the policy recommendations made by the international agencies.
Citing an example of the over 180 per cent subscription of the $500m domestic bond, Edun said all advice, information and data that “these institutions can provide is of value, but we don’t always have to take their advice.”
Additionally, the World Bank also revealed that non-performing loans across Nigerian banks had reached an alarming 5.1 per cent, according to a report.
The Nigeria Development Update published by the global apex bank disclosed that the ratio of NPLs to total loans increased by 0.6 per cent to 5.1 per cent in the first quarter of 2024, compared to Q1 2023.
“This ratio is marginally above the prudential benchmark of 5.0 per cent,” it said.
Non-performing loans are those whose obligation to pay or service has not been met by the debtor at the stipulated and agreed time.
When the bank’s non-performing loans are a ratio above 5 per cent, then a slightly higher percentage of loans are at risk of default than what is generally considered safe.
The World Bank also noted that the banking system’s capital buffers have been eroded, emphasising that the banking system’s capital buffers have been eroded due to high inflation, significant depreciation of the naira, and the increase in the NPL ratio.
It said, “The capital adequacy ratio of the banking system was 11.1 per cent in Q1 2024, down from 14.2 per cent in Q1 2023.”
It also noted that the large open market operations of the CBN have mopped up N6.6tn, 30 per cent more than the combined amount in three years.
“Importantly, the CBN has followed through on the MPC’s decisions with large open market operations at rates close to the MPR. In the first eight months of 2024, OMOs amounted to over N6.6tn, 30 per cent more than in the three previous full years combined.
“The monetary policy stance was tightened further by increasing the standing deposit facility rate from -300 bps around MPR to -100 bps, while the standing facility rate increased to MPR +500 bps.
“Consequently, market rates have been anchoring to the MPR recently. The new monetary policy framework has also attracted FX inflows and drained naira liquidity, contributing to solidifying the FX reforms,” it added.
