How can the CBN control the naira better?

Aug 16, 2022|Fadekemi Abiru

A few weeks ago, I wrote about why the naira is in crisis. It wasn’t fun to write, considering the impact of the currency you earn, losing roughly 15% in value within a week (so long summer holiday plans). Shortly after we published, I read this solution article to the current problems the CBN is facing with controlling the naira.

Now, it’s important to highlight that some things have changed since I came out and said the naira is in a currency crisis.
 

Key takeaways:

  1. The value of the naira on the parallel market keeps falling despite the central bank of Nigeria’s (CBN) best efforts to control the currency.

  2. One alternative to our current exchange rate policy that doesn’t involve floating the currency is a crawling peg. With a crawling peg, the central bank can allow the currency's value to move within a specified range in line with another macroeconomic indicator, usually inflation.

  3. However, three things are crucial for ensuring the crawling peg works: what currency the naira is pegged to, solid economic policy objective, and political economy.


According to parallel market rates, the naira gained momentum. However, the current parallel market rate is still an 18% fall in value compared to where we started this year. According to news reports, this movement is likely the result of the Central Bank of Nigeria’s (CBN) direct interventions in the exchange rate market. So, not necessarily because the Nigerian economy has improved significantly and investor interest has returned. Therefore, this relief might only be short-lived.

As a quick recap, the CBN needs ample international reserves to maintain its peg of ₦420/$1. When the naira falls below this value, the CBN can sell the foreign currency it has to shore up the value of the naira. Another useful approach would be hiking interest rates to attract foreign capital—as foreign investors demand naira because higher interest rates have made naira-denominated assets more favourable, the naira’s value should increase. Unfortunately, between our inefficient economy, the decline in oil revenues (our biggest FX earner), and the US Fed hiking interest rates to make the dollar more attractive, the CBN is struggling to attract the foreign currency it needs. To add to that, its interest rate moves have done little to sway investor interest toward the Nigerian economy.

Ultimately, Nigeria’s fixed (or managed, if you will) exchange rate regime is not sustainable. For the peg to hold at ₦420/$1, people must be willing to sell the naira at that rate. Unfortunately, the gap between the official and parallel rates

Invest with Confidence, Operate with Precision.

Access economic and industry data & insight for global organisations.

Trusted by leading global organisations
subscriber
subscriber
subscriber
subscriber
subscriber
subscriber
subscriber

Related