CBN’s Monetary Measures Support Nigeria’s Economic Stability, Growth

Oluchi Chibuzor

The Central Bank of Nigeria (CBN) is contributing significantly to efforts aimed at stabilising the economy, particularly through foreign exchange management, inflation control, and promoting foreign capital inflows. 

Despite challenges such as fiscal dominance and structural issues, the apex bank is actively coordinating with other authorities and implementing well-sequenced monetary policies to help restore market confidence. These steps, alongside other economic measures, have contributed to improved FX inflows, a decline in inflation numbers, and growth in the economy.

Monetary policy effectiveness plays a crucial role in building a sustainable economy and fostering business growth. The target is to ensure full impact on inflation figures, exchange rate stability, and economic growth.

In contributing to economic stabilisation, the CBN led by Olayemi Cardoso recognises the need to constantly enhance monetary policy effectiveness, especially in addressing the current challenging economic environment.

The regulator has therefore taken several strategic initiatives as part of broader economic stability efforts. These include fiscal-monetary policy coordination, where it works closely with other economic authorities to ensure that fiscal dominance (where excessive government borrowing undermines monetary policy) does not impede inflation control and economic growth. The CBN actively advises on sustainable fiscal practices.

The CBN has consistently encouraged FX inflows to support naira stability. The success of these efforts is seen in the surge in total inflows into the Nigerian Autonomous Foreign Exchange Market (NAFEM) by 21.4 per cent to $2.34 billion between July and August this year. The increased inflows came from individuals and non-bank institutions.

The data, obtained from the FMDQ Securities Exchange, indicated that total inflows rose from $1.92 billion in July 2024 to $2.34 billion in August 2024. The increase was driven broadly by stronger inflows from both domestic and foreign sources.

Analysts said the surge in dollar inflows is expected to help stabilize the naira and ease exchange rate pressures. Other steps contributed to a 35.5 per cent rise in inflows to $47.9 billion in the first half of this year.

Nigeria has also seen success in policies that led to the convergence of the official and parallel market exchange rates, reducing the premium to just 1.7% by mid-2024. This has helped restore market confidence in the naira. The liberalization of the FX market and removal of restrictions on 43 items has improved market transparency and liquidity.

The apex bank also continues to create and enhance financial instruments for foreign exchange and money markets, aimed at improving liquidity and attracting foreign investment into the Nigerian economy.

FX liberalisation gains

The success in FX market liberalisation is noticeable in the convergence between the official and parallel market rates. This reduced the chances of FX abuses and round tripping that previously dominated the market.

Cardoso promised that the forex market liberalisation policy implementation will promote free market entry and exit, transparency, boost dollar liquidity and create vibrancy within the forex market. The move he predicted, will attract Foreign Portfolio Investments (FPIs) and Foreign Direct Investment (FDIs) inflows to the economy.

The operational changes to the foreign exchange market also included the re-introduction of the “Willing Buyer, Willing Seller” model at the I&E Window- now the official market.

Charlie Robertson, head of Macro Strategy at Asset Management firm, FIM Partners, said the new methodology could help Nigeria attract more investment as it essentially abolishes the multiple exchange rates that frustrated investors. “It could take months but there could be more dollars swirling around in Nigeria now that the currency is officially very cheap,” Robertson said.

Monetary Policy Challenges

In achieving its mandate, the CBN faces several key challenges including high government borrowing, policy credibility, infrastructure deficits and limited FX inflows. Despite significant progress, limited foreign exchange inflows continue to restrict the ability to stabilize the naira and manage exchange rate volatility.

But it is not all gloom as foreign exchange management efforts have shown positive outcomes. Remittances from Nigerians in the diaspora grew by 23.48% year-on-year to $2.34 billion in mid-2024, further bolstering foreign exchange reserves.

Capital importation increased by 234.4% year-on-year, reaching $5.92 billion in H1 2024. The surge in foreign direct investment (FDI) and portfolio investments is attributed to policy reforms, including the liberalization of the FX market and the clearing of FX backlogs.

As part of efforts to stabilize the economy, major steps were taken, including raising the Monetary Policy Rate (MPR) by cumulative 800 basis points to 26.75%, while the cash reserve ratio was increased to 45%, all to manage inflation and liquidity.

FX market reforms, including the liberalization of FX trading and enhancing the operational efficiency of Bureaux De Change (BDCs), have increased foreign investor participation.

The CBN has worked to improve the efficiency of remittance services, further encouraging Nigerians in the diaspora to invest in the economy through licensed International Money Transfer Operators (IMTOs).

The substantial growth in remittance receipts is attributable to policy measures introduced to enhance liquidity in Nigeria’s foreign exchange market. These measures include granting licenses to new IMTOs, implementing a willing buyer-willing seller model, and enabling timely access to naira liquidity for IMTOs.

President, Association of Bureaux De Change Operators of Nigeria, Aminu Gwadabe, said the increase in remittances is a strong testament to ongoing efforts to bolster public confidence in the foreign exchange market, strengthen a robust and inclusive banking system, and promote price stability, which is essential for sustained economic growth.

Positive Economic Outlook

Nigeria’s nominal Gross Domestic Product reached N60.93trillion in the second quarter of 2024, reflecting significant improvements in the nation’s economy.

This is supported by strategic interventions and improving external factors like surge in crude oil production and expansion in the services sector. However, risks such as exchange rate pressures and rising energy costs remain significant challenges.

Inflation decline gains

Equally, while inflation remains high, recent data shows a gradual decline. The adoption of inflation targeting and tight monetary policy is expected to help keep inflationary pressures under control.

For the second consecutive time, inflation has dropped to 32.15 per cent. The National Bureau of Statistics (NBS) attributed the 1.25 per cent reduction from the 33.40 per cent rate it announced for July on the crash in the prices of food and non-alcoholic beverages.

In its Consumer Price Index (CPI) report for August, the NBS said food inflation dropped by 0.10 per cent from 2.47 per cent in the previous month to 2.37 per cent.

The fiscal side has gained more grounds despite high debt servicing costs and concerns about fiscal sustainability. Close coordination between monetary and fiscal authorities to mitigate risks and stabilize the economy is also working out effectively.

There was also a directive to the Nigerian National Petroleum Corporation (NNPC) and other Ministries, Departments, and Agencies (MDAs) to remit dollar revenues to boost reserves and strengthen the naira. The decision remains a positive step aimed at enhancing investor confidence in the economy.

Despite numerous setbacks in the economy, analysts strongly believe the current exchange rate framework is expected to increase transparency in the forex market, reduce exchange rate misalignment and transaction costs, and buoy investor confidence.