By Jeph Ajobaju, Chief Copy Editor
Travails besetting the naira are caused by the Central Bank of Nigeria (CBN), says the World Bank that has for years criticised Nigeria for fixing exchange and paying fuel subsidy, even though the European (EU) pays subsidy to farmers.
Essentially, it was CBN Governor Godwin Emefiele who came up for raps from the World Bank, a week after Peoples Democratic Party (PDP) governors expressed “deep concern” about the operational system and methods of the CBN.
They said the CBN operates as “an independent government within a government, which is a pervasion of the autonomy of the bank” and “creates money, decides how much of it to spend and on what to spend it on without any form of control or supervision patently subverts constitutional order.
“The CBN should take immediate steps to halt the depreciation of the naira,” PDP governors stressed in a communique issued on June 7.
The World Bank blamed the way the CBN handles foreign exchange (FX) for the current FX crisis in which naira exchange rate fluctuates widely daily. Officially, it sold for N411 to the dollar on Thursday, but N490 in the black market.
Impact of gap between two exchange rates
The World Bank made its remark in its Nigerian Development Update, which is published twice a year.
It said the CBN’s FX policy reduces supply in the market thus affecting investor confidence and leading to a ditch of the official market for the black market.
“The way the exchange rate was managed limited access to FX and thus adversely affected investor confidence and investment appetite,” the report said.
The disparity between the official I&E Foreign Exchange Window (IEFX) and the parallel market has widened to as high as N90 in recent weeks due to speculation, demand, and fear of devaluation.
“Significant spreads between the official, the IEFX, and the parallel exchange rate persisted throughout 2020 and as of April 2021, the spread between the official and the IEFX rate was estimated at 8 per cent and between the IEFX and the parallel rate, reached 18 per cent (the spread between the official and the parallel rate was 27 per cent),” the World Bank noted.
Last month, the CBN made its biggest move yet in unifying the exchange rate after it dumped its long-held official rate for the IEFX rate published by the FMDQOTC.
It has also extended the Cash4Dollar scheme introduced in March to drive more diaspora inflows into the banking system.
According to Nairametrics, most critics believe the moves came too late and would have been avoided if the CBN had been more pragmatic. The World Bank also blamed it for not going all in with its policy changes.
Recommendations for improvement
The World Bank recalled that “in May 2021, the CBN formally took concrete steps towards rates unification between the official and IEFX rates.
“However, the IEFX rate continues to be managed and is not fully reflective of market forces. Furthermore, there remains a 20 per cent premium between this unified rate and the parallel market rate.
“The two-month naira-for-dollars scheme introduced by the CBN in March 2021 to serve as an incentive for increased remittance inflows through formal channels was extended indefinitely in May and was preceded by regulatory directives in December 2020 – that mandated all licensed operators to pay remittances in dollars.
“While this may indeed encourage the use of the formal channels, it is not clear that incentive payments will increase remittances to the country.”
The World Bank recommended how the CBN address FX shortages and exchange rate disparity.
It urged the CBN to
· Allow the IEFX market function as it should by allowing a more market-friendly approach for exchange rate transaction.
· End an unreliable way of reporting exchange rate prices and adopt a two-way quote which enables banks to quote for their bid and offer prices just the way it is done in the stock market.
· Stimulate greater participation of oil companies in providing FX supplies, which can be achieved if the market is more transparent and flexible.
The World Bank believes a return to a flexible exchange rate (post-2015 and pre-2020) will allow for limited interventions by the CBN.
It explained that “while the CBN has taken steps towards operationalising unification of exchange rates, greater flexibility will be necessary to support the recovery.
“Until oil companies are allowed to sell FX receipts to IEFX bank participants, CBN would still have an important role to play as supplier of FX.
“In this scenario, participating banks in the FX market will start to play an expanded role that goes beyond just executing buy/sell orders of its clients to start acting as market makers, meaning that they start to quote two-way prices buying and selling on its own behalf and carrying a stock of FX.
“With increased flexibility, the CBN could start intervening only to smooth large fluctuations and work toward ensuring a single, market-driven rate. Keeping market stakeholders fully informed of such efforts would help attract both domestic and foreign investment.
“The right mix of exchange-rate flexibility and expanded supply (e.g., through banks and FX agents) would enable the FX market to efficiently allocate resources, which would allow the CBN to focus its interventions on smoothing large and disruptive FX fluctuations.”