As CBN Restricts Self To Core Responsibilities In New Policy Directions

Investors and industry watchers’ questions on which direction the Central Bank of Nigeria (CBN) will be going under the new governor, Dr. Olayemi Cardoso were finally answered at the weekend, as Cardoso said, the new regime at the apex bank will restrict self to core responsibilities. This, among other policy directions, he made at his first public speech at the 2023 Annual Bankers Dinner in Lagos.

Whilst many were expectant of a policy direction to be communicated at the last Monetary Policy Committee meeting of this year, a meeting that was supposed to hold this month, they had become even more apprehensive after the apex bank shelved the meeting and remained quiet on the reasons the meeting did not hold.

Cardoso, in his keynote address at the Bankers Dinner in Lagos eventually put a lid on the matter after he announced that the required number of meetings had been met, hence implying that there would not be another meeting this year.

According to him, “the CBN Act of 2007 stipulates that the MPC meets at least four times a year, “and the Bank has satisfied this requirement for 2023. We have critically reviewed the effectiveness of the Central Bank’s monetary policy tools and have spent time fixing the transmission mechanism to ensure the decisions of MPC meetings actually result in desired objectives.

“For quite some time, there has been a dislocation of our monetary transmission mechanisms rendering the MPC meetings largely ineffective. Our focus has been on ensuring these meetings are useful and effective.”

Noting that the CBN, before his appointment, had strayed from its core mandates and was engaged in quasi-fiscal activities that distracted the it from achieving its own objectives and took it into areas where it clearly had limited expertise, he said “under my leadership, the CBN will tackle institutional deficiencies, restore corporate governance, strengthen regulations, and implement prudent policies. We assure investors and the business community that the economy will experience significant stability in the short-to-medium term as we recalibrate our policy toolkits and implement far-reaching measures.

“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.

“Monetary policies will aim to achieve price stability, foster sustainable economic growth, stabilise the exchange rate of the naira, and reduce interest rates to facilitate borrowing and investments in the real sector. In order to ensure the proper functioning of domestic and foreign currency markets, clear, transparent, and harmonized rules governing market operations are essential.

“New foreign exchange guidelines and legislation will be developed, and extensive consultations will be conducted with banks and forex market operators before implementing any new requirements. We have already witnessed improvements in forex market liquidity in recent weeks, as the market responded positively to tranche payments which have been made to 31 banks to clear the backlog of forex forward obligations.

“We have been subjecting these payments to detailed verification to ensure only valid transactions are honored. In a properly functioning market, it is reasonable to expect significant forex liquidity, with daily trade potentially exceeding $1.0 billion. We envision that, with discipline and focused commitment, foreign exchange reserves can be rebuilt to comparable levels with similar economies.

“To ensure stability, curb speculation, and restore confidence in the foreign exchange market, we have initiated the payment of unsettled forward foreign exchange obligations, and these payments will continue until all obligations are cleared. This intervention has already had a positive impact on liquidity and has led to a significant appreciation of the exchange rate at certain points.

“The CBN also recently lifted the ban on 43 items from accessing the official foreign exchange market, allowing market forces to determine exchange rates based on the Willing Buyer – Willing Seller principle. We are witnessing clear progress in stabilising the Nigerian foreign exchange market.”

Meanwhile, the CBN governor gave indications that monetary policy hawkish stance may not be at its end yet stating that in driving down inflation to meet its target, there would be continued tightening over the next two quarters.

“While absolute inflation is still rising, the declining rate of growth indicates progress.

The CBN is confident that with continued tightening measures for the next two quarters, we will be able to effectively manage inflation.”

He also affirmed that the efforts of the CBN over the past two months have begun to yield fruit. “Regular Open Market Operations (OMO) to mop up excess liquidity from the banking system. An OMO auction was recently held with a stop rate of 17.5 per cent for the one-year tenor, attracting oversubscription of N350 billion. Another round of OMO has been approved to further reduce excess liquidity.

“Offering N108.1 billion worth of Treasury Bills with three tenors to the investing public, which can help reduce liquidity in the banking system and support government fundraising. Removal of the cap on the remunerable Standing Deposit Facility (SDF) to increase activity in the SDF window and manage liquidity.

“Sustained Cash Reserve Requirement (CRR) debits, which have moderated liquidity in September and October 2023. Liquidity in the entire banking sector has been significantly reduced to under N100 billion in November. Inauguration of a new liquidity management committee within the Bank that meets daily at 8am to assess liquidity conditions and ensure optimal levels.

“These measures have already started to yield results, as excess liquidity in the banking system has significantly reduced and the Overnight Bank Borrowing (OBB) rate has increased to a level consistent with the monetary policy program. Month-on-month inflation has also begun to decline, with a growth rate of 0.67 per cent in October compared to 0.97 per cent previously.