With its huge natural resources, including oil and gas, solid minerals as well as a youthful population, Nigeria, at independence in 1960, clearly had the potential to become a respected global player.

However, six decades later, the country is certainly not living up to its potential.

Decline in GDP

Indeed, in its latest World Economic Outlook released in May, the International Monetary Fund (IMF) had forecast that Nigeria’s economy, which ranked as Africa’s largest in 2022, will slip to fourth place this year behind Algeria in third place, Egypt, in second place and South Africa in first place.

Specifically, the IMF report estimated Nigeria’s Gross Domestic Product (GDP) at $253 billion based on current prices this year, compared to Algeria’s at $267 billion, Egypt’s at $348 billion and South Africa’s at $373 billion.

The report also shows that Nigeria is likely to remain in fourth place for years to come. Analysts blame the shrinking of the size of the country’s economy on the forex reforms introduced by the Central Bank of Nigeria (CBN) that saw the apex bank carrying out two devaluations of the naira between June last year and May this year.

Reforms/appointment of new CBN team

Interestingly, the CBN introduced the forex reforms after President, Bola Tinubu, in his inaugural speech on May 29 last year, announced the removal of a costly fuel subsidy and pledged that his administration would work to scrap the country’s multiple exchange rates regime.

A fortnight after the President’s pronouncements, the CBN collapsed all segments of the foreign exchange market into the I&E window and reintroduced the “willing buyer, willing seller” model at the window.

The move meant that the regulator had unified its multiple exchange rates. It followed up the new measures with another circular on further changes to the forex market.

Key directives in the circular included, the eligibility of all visible and invisible transactions for the I&E window, unrestricted access to funds in ordinary domiciliary accounts by account holders, reducing cash withdrawal and lifting transfer restrictions to allow amounts not exceeding $10,000 per day or its equivalent via telegraphic transfer.

The directives also included the elimination of the restriction of cash deposits into domiciliary accounts, orderly settlement of any committed FX forward transactions by the apex bank and normalization of the regulator’s Cash Reserve Ratio (CRR) maintenance processes to ensure equity in its implementation across the banking industry.

Even as the CBN was implementing the forex reforms, Tinubu ousted former Governor of the CBN, Godwin Emefiele and his four Deputy Governors and announced Mr. Olayemi Cardoso as the new CBN Governor.

He also named four new Deputy Governors of the apex bank: Mrs. Emem Usoro, Mr. Muhammad Dattijo, Mr. Philip Ikeazor, and Dr. Bala Bello.

Praise for reforms

Reacting to the reforms at the launch of the June 2023 edition of its Nigeria Development Update (NDU), on June 27, the World Bank said changes to Nigeria’s foreign exchange market and the removal of an expensive subsidy on fuel, could save the country up to N3.9 trillion this year alone.

The bank said in the report that “yhe removal of the subsidy, coupled with the FX reforms, are expected to provide fiscal savings of around N3.9 trillion in 2023 or 1.6 percent of GDP.

Between 2023 and 2025, the savings would be over N21 trillion, compared with a scenario in which the fuel subsidy had continued, and the previous exchange rate regime had continued.

“The revenue-to-GDP ratio will rebound, reaching 7.4 percent of GDP in 2023, or 1.4 percentage points of GDP higher than if the reforms had not been enacted.

The fiscal deficit is still expected to remain large, at 5.1 percent of GDP in 2023, before falling to 4.0 percent in 2024 and falling further to 3.9 percent of GDP in 2025. As such, debt servicing is expected to be lower than in the continuation of the subsidy scenario.”

The bank, however, warned of an increase in inflation in the short term as well as lingering fiscal risks.

Cardoso’s pledge

However, at the first major event he attended as CBN Governor, Cardosothe Chartered Institute of Bankers of Nigeria’s (CIBN) 58th Annual Bankers’ Dinner, held in Lagos on November 24, 2023- emphasised that the apex bank was continuing with efforts to tackle inflation and exchange rate instability.

He said: “The Central Bank of Nigeria is committed to achieving monetary and price stability. This is not just a technical objective, but it has real-life implications for the wellbeing of our citizens.

“Through targeted policies, transparent market operations, and coordination between monetary and fiscal authorities, we can ensure a more stable exchange rate, control inflation, and create an enabling environment for businesses and individuals to thrive.”

Citing data obtained from Reuters, the FDC stated that the naira depreciated by 0.88 per cent to N1,700.00/$1 after the MPC again hiked the interest rate at its meeting last Tuesday

He further said: “The primary mandate of the CBN is to ensure price stability, in addition to other objectives such as issuing legal tender currency, safeguarding external reserves, promoting a sound financial system, and providing economic and financial advice to the government.

In line with our strategy to refocus on our core mandate, the CBN will discontinue direct quasi-fiscal interventionist activities and instead utilize orthodox monetary policy tools for implementing monetary policy.

“As part of this refocus, the CBN has just approved the adoption of an explicit inflation-targeting framework to enhance the effectiveness of our monetary policy.

The details and requirements for this framework are currently being finalised alongside the fiscal authorities. “Additionally, the CBN will provide forward guidance, enhance transparency, and maintain effective communication with the public to anchor expectations and build trust among stakeholders.”

NESG economic outlook

Furthermore, in his address at the 2024 macroeconomic outlook launch hosted by the Nigeria Economic Sum – mit Group (NESG) in Lagos on January 24, Cardoso disclosed that the CBN was aiming at an inflation rate of 21.4 per cent this year.

He stated: “Inflationary pressures are expected to decline in 2024 due to the CBN’s inflation-targeting policy, which aims to rein in inflation to 21.4 percent.

This will be aided by improved agricultural productivity and the easing of global supply chain pressures, benefiting businesses by boosting consumer confidence and purchasing power.”

According to the CBN Governor, “The outlook for decreasing inflation in 2024 will have a profound impact on businesses, providing a more predictable cost environment and potentially leading to lowered policy rates, stimulating investment, fueling growth, and creating job opportunities.”

He announced that as part of efforts to ensure sustainable economic growth for the country, the CBN had reverted to the conventional monetary policy approach with a focus on attaining price stability.

Inflation fight

Although the CBN raised the benchmark interest rate-the Monetary Policy Rate (MPR)-at the Monetary Policy Committee’s (MPC) meetings held in February, March, May, inflation maintained its upward trend and only declined for the first time in 19 months to 33.4 per cent in July.

Despite inflation falling for a second consecutive month to 32.15 per cent in August, the CBN at its MPC meeting, last month, maintained its monetary policy tightening stance by raising the MPR by 50 basis points to 27.25 per cent from 26.75 per cent.

It also retained the asymmetric corridor around the MPR at +500/-100 basis points; raised the Cash Reserve Ratio of Deposit Money Banks by 500 basis points to 50.00 per cent from 45.00 per cent and that of Merchant Banks by 200 basis points to 16 per cent from 14 per cent.

In addition, the apex bank retained the Liquidity Ratio at 30.00 per cent. Shedding light on why the MPC still hiked interest rates despite the decline in inflation in the months of July and August, CBN Governor, Cardoso, said:

“The MPC noted that even though headline inflation trended downwards due to a moderation in food inflation, core inflation has remained elevated, driven primarily by rising energy prices.

The uptrend poses severe concerns to members, as it clearly indicates the persistence of inflationary pressures. “Members thus, reiterated the need to work in close collaboration with the fiscal authority to address the current upward pressure on energy prices.

The MPC noted the continued growth in money supply, recognising the need to curtail excess liquidity in the system as well as address foreign exchange demand pressures.

Members were also concerned about the growing level of fis – cal deficit but acknowledged the commitment of the fiscal authority not to resort to monetary financing through Ways & Means.

“Furthermore, members observed a strong correlation between FAAC releases and liquidity levels in the banking system as well as its impact on the exchange rate.

The Committee, therefore, agreed to increase monitoring of future releases with a view to addressing its effects on price developments.”

Naira stability

Analysts also point out that although the CBN’s forex measures, including the resumption of forex sales to Bureaux De Change (BDCs) helped the naira to recover from a record low of about N1,800 per dollar at both the official and parallel FX markets, to its current level of about N1,600 per dollar, the local currency has been volatile in recent weeks.

In a report released last week, Financial Derivatives Company (FDC) warned that the naira’s weakness, could, “weigh on investors’ confidence and increase inflationary pressures,” has said.

Citing data obtained from Reuters, the FDC stated that the naira depreciated by 0.88 per cent to N1,700.00/$1 after the MPC again hiked the interest rate at its meeting last Tuesday.

High interest rates

Similarly, analysts at Comercio Partners have cautioned the MPC’s decision to further tighten monetary policy in its bid to tame inflation.

“The analysts said that though the MPC’s decisions indicate that the apex bank remains committed to fighting inflation, they, “could have unintended consequences on the broader economy.”

They pointed out, for instance, that elevated borrowing costs and tighter credit conditions may crowd out private investment and weigh on economic growth.

The analysts further said: The aggressive increase in CRR will severely constrain banks’ ability to lend, limiting credit access for businesses and individuals. This tightening of credit conditions could hamper economic expansion, particularly in sectors dependent on bank financing.

The reduction in lending is expected to slow down economic activity, affecting sectors like manufacturing, services, and construction that rely on credit for growth. This slowdown could be especially harmful in an environment where unemployment has risen from five per cent to 5.3 per cent.”

Stressing that “high interest rate will continue to put pressure on the already suffering real sector, which could lead to crowding out and increase unemployment rate,” thus increasing the country’s misery index, the analysts, however, said:

“The tighter monetary policy may lend some support to the naira, particularly against the backdrop of a recent interest rate cut by the U.S. Federal Reserve. “A stronger naira could help mitigate some of the inflationary effects from imported goods.

However, exchange rate volatility remains a major risk factor, especially given Nigeria’s broader economic uncertainties and external pressures.”

New Capital base and revocation of Heritage Bank’s licence However, apart from the CBN’s efforts to curb inflation and ensure exchange rate stability, other recent notable developments in the financial sector were the regulator’s revocation of the operating license of Heritage Bank in June this year, its sacking, in early January, of the boards of Union Bank, Polaris Bank and Keystone Bank, on the grounds of regulatory noncompliance, corporate governance failure, among other misdeeds and its announcement of new minimum capital requirements for the banking industry.

According to the guidelines on the new Banking Sector Recapitalisation Programme released by the CBN on March 28, the new minimum capital base for commercial banks with international authorisation has been reviewed upwards to N500 billion from N50 billion.

Also, the new minimum capital base for commercial banks with national authorisation was raised to N200 billion, while the new requirement for those with regional authorisation was increased to N50 billion.

In addition, the new minimum capital for merchant banks was raised to N50 billion, while the new requirements for non-interest banks with national and regional authorisations were increased to N20 billion and N10 billion, respectively.

The guidelines emphasized that all banks are required to meet the minimum capital requirement within 24 months commencing from April 1, 2024, and terminating on March 31, 2026.

Conclusion

Although the consensus among financial experts is that the recapitalisation programme is needed to further strengthen the country’s banks, analysts believe that the CBN and fiscal authority will have greater success in accelerating economic growth if they effectively tackle inflation and the forex crisis.