The Central Bank of Nigeria (CBN) is likely to gradually clear its huge foreign currency obligations with funds obtained from the recent Federal Government of Nigeria and the Nigerian National Petroleum Company Limited (NNPCL) deal, says the Standard Bank Group.
This summation was contained in the financial group’s African Markets Revealed report, which was made available to BusinessDay on Thursday and provides a comprehensive forecast for Nigeria and 17 other key African countries.
In analysing a crucial macroeconomic challenge, the researchers expressed optimism that the tripartite agreement involving the Federal Government, NNPC Limited, and the African Export-Import Bank (AFREXIM) will initiate steps to gradually eliminate the substantial FX backlog exceeding $10 billion.
Hopefully, clearing off this humongous backlog would restore the stability of the naira and perhaps increase investor confidence in a currency that has lost more than 65 percent of its value since President Bola Ahmed Tinubu harmonised the FX market.
The bank predicted that, on the back of clearing this backlog, the naira should exchange for N1,171 for USD at the official market by December this year.
“We see the USD/NGN pair at 1,171 by Dec 24 in the official market,” it said. “The CBN is likely to keep gradually clearing its foreign currency obligations with funds from the FGN and NNPC capital raises, shifting FX liabilities away from the CBN, which would liberate FX reserves to support the market and foster investor confidence.”
The researchers added that once Apex Bank’s aggressive policy on clearing its FX obligations starts to yield fruit, attracting much-needed foreign direct investment will no longer be a serious challenge.
It noted, “Until confidence in CBN reserves returns to the market, we forecast only a gradual improvement in foreign private sector inflows.”
The researchers commended the management of the CBN for implementing significant reforms, including reversing policies from the previous administration, such as eliminating multiple FX windows, ending the RT200 rebate and Naira4Dollar scheme, lifting FX restrictions on 43 prohibited imported goods, and addressing outstanding FX obligations. These reforms are seen as having the potential to rectify many of the market abnormalities.
However, fighting inflation in the country still remains one of the key objectives of the monetary authority.
As foreign investors and analysts grow impatient with the CBN Governor’s reliance on punitive bank rules and interest rate hikes to curb inflation, researchers from the financial group observe that Cardoso is choosing alternative tools such as the Standing Deposit Facility (SDF), ad hoc Cash Reserve Ratio (CRR) debits, and Open Market Operations (OMO) sales to address liquidity concerns amid inflation rates surpassing 25 percent.
In summary, the researchers express a strong belief that the CBN’s current management will persist in utilising SDF, CRR, and OMO to handle liquidity and inflation throughout 2024.
The report read, “We expect the CBN to continue employing these tools to manage liquidity and, over the coming year, redress the excessive monetary expansion caused by the fiscal dominance of previous regimes.”
