President Bola Tinubu on Friday appointed Olayemi Michael Cardoso as the new Governor of the Central Bank of Nigeria (CBN), amid confusion around the clearing of the foreign exchange (FX) backlog.
The appointment is for a term of five years at the first instance, pending his confirmation by the Nigerian Senate.
One of the inherited challenges for Cardoso is how to clear the FX backlog estimated to be around $10 billion and to ensure stability of the exchange rate and single-digit interest rate as Tinubu promised.
“Great appointments, I expect the new team to implement a policy that will lead to stable FX rate and bring down inflation rate,” said Ayodele Akinwunmi, relationship manager, corporate banking at FSDH Merchant Bank Limited.
Today (Monday) is the end of the two-week timeline given by the Central Bank of Nigeria (CBN) to work with the banks to clear the foreign exchange (FX) backlog, yet there is no indication that this has been achieved.
Read also Clearing FX backlog seen restoring investors’ confidence, naira stability
The CBN said on Friday that it has made some progress. “We have made progress at our end; talk to bank managing directors”, one of the top officials of the CBN, said in a chat with BusinessDay.
Bank sources said on Friday that there was no effort towards clearing the backlog and that the CBN should be able to say what they have done.
If part of the forex backlog, estimated to be about $10 billion, has been cleared, it will reflect in the value of the naira strengthening for the short term as agreed by most analysts.
The pressure on the foreign exchange continued on Friday as the naira fell to record low at the parallel and official FX markets.
Naira fell to an all-time low of N955 per dollar as demand for the greenback intensified at the parallel market, popularly called black market.
At the Investors’ and Exporters’ (I&E) forex window, Nigeria’s official FX market, naira fell by 2.88 percent as the dollar was quoted at N780.00 on Thursday compared to N758.12 on Wednesday and weaker than N742.10/$1 quoted on Tuesday, data from the FMDQ indicated.
“Since they made the promise, they should be followed. I don’t know what gave the CBN the confidence that it will be able to clear the FX backlog but it is a promise it has made,” Muda Yusuf, chief executive officer of the Centre for the Promotion of Private Enterprise, said.
Most analysts were unanimous in their summation that clearing FX backlog will restore confidence in the economy and help stabilise the naira.
Year-to-date, the local currency has depreciated by 65.60 percent from N471 per dollar before the FX unification to the current rate of N780/$1 at the I&E window.
At the black market, naira has weakened by 25.65 percent year-to-date to N955 per dollar, currently from N760/$1 before the forex liberalisation.
With the current rates, the exchange rate gap between the official and parallel segments of the FX market has widened to N175 per dollar from N96/$1 after FX unification in June 2023.
On June 14, 2023, the CBN collapsed all segments of foreign exchange markets into the investors and exporter’s forex window.
According to a circular signed by Angela Sere-Ejembi, director of financial markets, applications for medicals, school fees, business travel allowance and personal travel allowance (BTA/PTA), and SMEs would continue to be processed through deposit money banks.
Taiwo Oyedele, former head of tax and corporate advisory services at PwC Nigeria, said the aggregate demand for FX across markets should reduce as round-tripping incentives are removed, for instance, people who fake foreign travels to get FX at discounted rates. Also, Nigeria’s sovereign credit rating should improve if this is complemented with the right fiscal and monetary policies, attracting more FX inflows and lowering the cost of borrowing.
Read also Naira falls to N927/$ despite CBN’s plans to clear FX backlog
Folashodun Adebisi Shonubi, former CBN’s acting governor, said on September 4, 2023 that clearing the FX backlog is something the apex bank has been discussing for a while, “and we expect that we will clear it in the next one or two weeks,” he said.
He said the obligation overhang people keep discussing will not be there.
Ayodeji Ebo, managing director/CBO, Optimus by Afrinvest, said this is a welcome development; however, the strategy for achieving this was not clearly stated.”
He said if this is done, it will boost confidence in the economy and close the gap between official and parallel markets.
“This is very important. To complement this move, the 41 items in the exclusive list should be eradicated to shift demand back to the official market. For instance, traders in Eurobonds would create liquidity in the foreign exchange market because of their trades,” he said.
According to a report by FBNQuest, despite the CBN’s decision to float the naira in June 2023, it has had limited success in increasing foreign exchange inflows, as offshore investors have mostly remained cautious.
Monthly transactions on the investors’ and exporters’ (I&E) FX window for 8 million 2023 are currently running at an average of USD2.1bn, compared with USD2.4bn over the comparable period of 2022.
At first glance, the total reserves as of the end of ’23 covered 7.0 months of merchandise imports based on the balance of payments for the 12 months to Dec ’22 and 5.6 months when we add services.
A report by Vetiva noted that Nigeria’s reserves are fully sufficient to cover its current account, which is in a surplus position.
Consequently, the debt-reserve metric for Nigeria is deemed adequate. South Africa equally has enough reserves to cover its short-term external debt.