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Wednesday, November 6, 2024

World Bank Advises Nigeria’s Central Bank to Halt FX Market Interventions

Call for Transparency and Strategic Reserve Building to Strengthen Naira as Banking Sector Faces Mounting Risks

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The Central Bank of Nigeria (CBN) has been urged by the World Bank to step back from frequent interventions in the foreign exchange market and adopt a more structured, transparent approach to currency management. The advice, which is part of the World Bank’s Nigeria Development Update, suggests that CBN should build foreign reserves strategically and allow more flexibility in the foreign exchange market to stabilise the naira.

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The call follows an $876 million foreign exchange auction on August 26, 2024, the largest under CBN Governor Yemi Cardoso’s leadership. The auction, held via a Dutch auction system, marked a shift away from the previous foreign exchange distribution to Bureau de Change operators, aiming to address liquidity shortages and control exchange rate volatility.

However, the World Bank’s report advocates a more market-driven approach to exchange rate policy. It recommended “maintaining a unified, market-reflective exchange rate” and advised the CBN to foster a stable FX market by enhancing remittance inflows, consolidating FX sales from international oil companies within the official market, and ending irregular forex auctions.

“Exchange rate policy should continue to be geared towards maintaining a unified, market reflective exchange rate, whilst deepening the FX market,” the report states. “Allowing market participants more flexibility over time would also deepen the FX market, building resilience.”

The report also highlighted Nigeria’s financial stability challenges, especially the rise in non-performing loans (NPLs) and the depletion of banking capital. According to the World Bank, Nigeria’s NPL ratio rose to 5.1% in early 2024, exceeding the regulatory threshold of 5%. This increase is attributed to high inflation, naira depreciation, and economic pressures, reducing banks’ capital adequacy ratio to 11.1% from 14.2% a year prior.

With the economy grappling with high inflation and a weakened currency, CBN’s open market operations have withdrawn N6.6 trillion in liquidity, surpassing amounts seen in previous years. This tighter monetary stance, according to the World Bank, has helped attract foreign exchange inflows while stabilising FX market rates closer to the central monetary policy rate.

At the recent World Bank-IMF meeting in Washington, Nigeria’s Finance Minister, Wale Edun, acknowledged the insights from international institutions but stressed that the government remains selective in implementing policy recommendations. Notably, Edun cited the successful $500 million domestic bond issuance, which was oversubscribed by over 180%, as an example of Nigeria’s independent economic resilience. “All advice is valued,” Edun said, “but we don’t always have to take it.”

As Nigeria faces a challenging economic landscape, the World Bank’s recommendations are likely to fuel debate over the CBN’s strategy for managing currency volatility, fostering stability in the banking sector, and the nation’s ongoing economic reforms. The question remains whether the Central Bank will align with the World Bank’s roadmap for a more flexible and transparent foreign exchange regime.

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