Newsonline reports that since the Governor of the central bank, Godwin Emefiele took office in March 2014 to date, the Naira official rate compared to the US Dollar has depreciated from N164 to N419 (or 61% weaker)
In the parallel market, the situation is even worse, whereby the Naira has weakened from $1/N180 to $1/605. This is a 70.5% depreciation of the Naira in 8 years.
This rapid depreciation over a span of 8 years has occurred despite numerous forex policies by the CBN, albeit policies have been skewed towards capital controls and demand-side management.
In recent times, the CBN seems more focused on boosting organic dollar inflows.
In terms of long-term potential solutions, the CBN is championing the pan-African payments system (PAPSS) whereby countries in Africa no longer need USD$ to settle intra-African trade. Such that a Nigerian trader and a South-African retailer can seamlessly settle transactions without ever needing to convert into dollars. Thus, further reducing the pressure on the Naira
It is worth noting that despite all the efforts of the CBN, there are key macroeconomic realities which monetary policies alone are a blunt tool to impact.
Specifically, inflation and economic growth. In countries with high inflation, there is usually huge outflows of capital as folks are reluctant to save in that currency given that inflation will erode the value of your savings. When high inflation is compounded by low growth, this simply accelerates the capital flight.
Consequently, despite the flurry of new policies designed to organically attract dollar inflows, the twin challenges of high inflation and low growth remain a stumbling block to increased dollar inflows.
The CBN has the option to increase interest rates to attract more investors but thus far, the apex bank appears to be unwilling to pull that lever, attributing its stance to a need to pursue development finance agenda to boost economic growth
However, the CBN is under additional pressure to reevaluate its dovish stance in light of the recent surge in inflation, which is currently about 16.82%. Furthermore, the Nigerian central bank is most certainly watching what is happening in South Africa, Ghana, and other developing market countries that have also raised interest rates.
The aforementioned twin challenges of high inflation and low growth, coupled with the CBN’s low-interest rate stance have simply meant that Nigeria’s capital inflows plummeted to a four-year low of $9.66 billion in 2020, only to drop further to $6.7 billion in 2021.
Ultimately, it is likely that from a monetary policy perspective further actions will be required such as an interest rate hike, as words and intent alone are insufficient to attract the necessary capital inflows required to stem the ongoing Naira depreciation.
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