Nigerian Monetary Policy Under Governor Yemi Cardoso



By Chinedu Okoye 


Background:

Central Bank Governor Yemi Cardoso commenced his tenure with the task of stabilizing the declining Naira and addressing inflation. In his brief to the Senate, the Central Bank Chief promised to; boost FC inflows, stabilize exchange rates and "minimize it's pass through to domestic inflation".

Highlighting the policy effects so far he stated that the recent $1 trillion Naira Treasury Bills actions attracted "upward of $1 billion". In this paper Zero Equilibrium highlights and explains the policies of the new Bank Governor. 



Policy Overview and Highlights: 

Key policies implemented to achieve exchange rate and price stability include: A floating exchange rate policy, market Unification, a new CRR Framework and a Directive to IMTOs to pay out Naira from foreign funds transfers. 

1. Floating Exchange Rate: Transitioning from a fixed floating to a free floating exchange rate regime aimed to reduce the high costs associated with defending the Naira due to a high demand for US Dollars.

2. Exchange Rate Unification: The adoption of a willing buyer willing seller model aimed to unify official and street market rates, reducing the spread between NAFEM and P2P rates despite a significant depreciation of the Naira.

3. New CRR Framework: The Central Bank announced a transition to an incremental approach linked to bank deposit growth for Cash Reserve Ratio collection, aiming to streamline banking operations and enhance liquidity management.

4. De-Dollarization of IMTO Payments: Requiring International Money Transfer Operators to settle FX transfers to Non-Domiciliary account holders in Naira at prevailing exchange rates aimed to improve FX liquidity by discouraging hoarding.



Policy Objectives and Analysis:

Stability and Exchange Rate Unification:

The exchange rate policy seeks to stabilize markets by allowing market forces to determine the Naira's value. Even though we argued for a Systemic Float and a more active management of scarce foreign exchange, reversing the ban on key goods complements this move to avoid market fragmentation. It is impossible to run a free float whilst sidelining a particular segment.


Demand Reduction and Supply Maximization:

The Central Bank aims to manage demand and increase foreign earnings supply by allowing the Naira to float and unifying markets. Prohibiting dollar payments to Non-Domiciliary accounts aims to curb speculative demand through this channel, and enhance transparency.


Enhanced Money Supply:

The new CRR framework incentivizes banks to manage liquidity and increase lending through a flexible approach tied to deposit growth. This could stimulate economic activity and output growth by providing credit facilities to businesses across sectors while ensuring regulatory compliance.



Concluding Remarks:

Overall, the Governor's approach emphasizes market-driven policies to stabilize the exchange rate, manage demand, and enhance liquidity, thereby stimulating economic growth within regulatory frameworks.

By floating the Naira, in a willing buyer willing seller model, the bank is betting on the government's ability to attract Foreign Direct and Foreign Portfolio investments as relevant departments and ministries work to improve export earnings from diversified income sources. 

The stock market performance and the success at the recent Treasury Bill offering are positive signals, but insufficient for stability and there remains a need for complimentary policies on the fiscal side. 


Comments

  1. Sunday C. OlubiyiFebruary 11, 2024 at 8:41 AM

    I think the Cardoso era as the CBN governor will be very successful with all of these policies, in the quest to bringing some values to the naira (monetary side). I just hope the same energy is used in the fiscal side.
    I love this article. Well done Chinedu

    ReplyDelete

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