The Central Bank of Nigeria has been advised against intervening in the foreign exchange market through forex auctions.
The World Bank’s policy advisory, included in the Nigeria Development Update, emphasizes the need for a comprehensive and transparent framework for exchange rate interventions to support flexibility.
On August 26, 2024, the CBN auctioned $876.26 million to end users via a retail Dutch auction, marking a significant shift from its traditional sales to Bureau De Change operators.
This auction represents a key foreign exchange intervention by the CBN under Governor Yemi Cardoso, aimed at stabilizing the naira and addressing FX market volatility.
The CBN indicated that the auction was designed to improve liquidity, ease demand pressures, and support price discovery.
The sales report revealed that 3,347 firms accessed dollars through 26 banks, with a cut-off rate of N1,495 per dollar.
But the Bretton Woods Institution in its latest report noted that permitting market participants to trade FX with more flexibility across time would also contribute to deepening the FX market.
The report read, “Exchange rate policy should continue to be geared towards maintaining a unified, market reflective exchange rate, whilst deepening the FX market. The CBN should continue efforts towards deepening the official FX market, including by facilitating formal remittances inflows, allowing international oil companies to fully concentrate their FX sales in the official market, restoring intermediated market access to bureaux de change, and refraining from ad-hoc FX auctions.
“Allowing market participants to trade FX with more flexibility across time would also contribute to deepening the FX market.”
The CBN emphasized the importance of strategically building foreign reserves to better assess the fair value of the naira against foreign currencies. This approach aims to create a stable and predictable economic environment, fostering conditions that support both domestic and international trade.
“In addition, continuously reaffirming the commitment to exchange rate flexibility, adopting a comprehensive, systematic, and transparent framework for CBN FX interventions, and building reserves would contribute to anchoring exchange rate expectations to fundamentals rather than to perceived targeted rate levels. Maintaining the single, market-reflective exchange rate is crucial to increase fiscal revenues (from oil and taxes on other export-related profits, customs, and VAT on imports), attract investment, build external reserves, and, in turn, set the conditions for investment and inclusive growth,”the CBN said.
It remains to be seen if the apex bank will adhere to the recommendations.
At the IMF/World Bank annual meeting in Washington, D.C., Finance Minister Wale Edun acknowledged that the Nigerian government has not fully implemented all policy recommendations from the international agencies. This statement highlights ongoing challenges in aligning domestic policies with international expectations to foster economic stability and growth.
Citing the example of over 180 percent subscription for the $500 million domestic bond, Edun said all advice, information and data that “these institutions can provide is of value, but we don’t always have to take their advice
