Banking & Finance

Nigerian FX Market: The Rekindling

Recently, the FX market in Nigeria has been experiencing a lot of instability, thereby prompting new regulations and policies introduced by the Central Bank of Nigeria (CBN) to improve liquidity and price stability. In February, the market experienced some turbulence as the dollar hit an all-time high of N1851.00/USD at the NAFEM window, compared to N1130.00/USD in January 2024.

In a bid to save the Naira, regulatory bodies have been spry with circulars, and policy actions, such as capping the Net FX Open Positions of banks, clearing FX backlogs, regulating BDCs operations, introducing a circuit breaker mechanism of ±5% band around NAFEX rates etc. This was topped with a “Foreign Portfolio Investor Call” webcast by CBN promising to improve transparency and efficiency of the FX market in the coming weeks.

This move to a more orthodox policy set up has prompted us to shift to a constructive outlook for the naira as the policy steps implemented to date show a turning point in the right direction. A decisive rate increase and confirmation in policy shift is required to achieve macro stability and give our FX outlook more strength.

MPR up by +400bps
After what may be termed a Monetary Policy Committee (MPC) hiatus (from July 2023 to January 2023),followed by a barrage of aggressive monetary policy measures to tighten the money supply, and stabilize the FX market by the new CBN Governor, Dr. Olayemi Cardoso, the newly assembled committee sat on the 26th and 27thof February to decide critically on the benchmark rate of the economy.

The result was a whopping 400bps hike in the Monetary Policy Rate (MPR) from 18.75% to 22.75%.Other alterations made by the committee members include upward revision of the Cash Reserve Ratio (CRR) from 32.50% to 45.00% and widening the lower limit of the Asymmetric corridor from +100/-300bps to 100/-700bps. The Liquidity ratio remained unchanged at 30%.

The MPC decision was tied to the current high inflation (29.90% y/y) and exchange rate pressures as it aims to stabilize the economy in the short to medium term.


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