Restore confidence in Nigeria’s Forex market, CPPE tasks CBN Governor

The Centre for the Promotion of Private Enterprise (CPPE) has said that among the pressing agenda needing attention for the new Central Bank of Nigeria (CBN) governor, Dr. Olayemi Cardoso, restoring confidence in Nigeria’s Forex market come tops.

In a statement signed at the weekend by the Director/CEO of CPPE, Dr. Musa Yusuf, the Nigerian economy is grappling with severe adverse effects of depreciating exchange rate, soaring energy costs, ravaging inflationary pressures, huge backlog of foreign exchange obligations that need to be cleared and debt service obligations that need to be redeemed.

According to the CPPE, “The Centre for the Promotion of Private Enterprise [CPPE] lauds the nomination of Dr Olayemi Cardoso as the Central Bank of Nigeria Governor.  He has the academic, cerebral, and industry credentials to head the apex bank.  He also has the pedigree, disposition, and character that the position demands.

“The CPPE presents the following as an agenda-setting proposition for the new CBN team:

“Restoring confidence in the nation’s forex market is perhaps the most urgent task before the new CBN Governor, Dr Cardoso, assumes the leadership of the CBN at a very crucial time in our economic history.

“There is a serious confidence crisis in the foreign exchange market fueling an unprecedented speculative onslaught on the naira. The economy is grappling with severe adverse effects of the depreciating exchange rate, soaring energy costs, ravaging inflationary pressures, a huge backlog of foreign exchange obligations that need to be cleared, and debt service obligations that need to be redeemed.  “Sadly, these outcomes are manifesting at a time when the country’s foreign reserves have been substantially encumbered. There is an apparent deceleration in the pace of economic reforms as the outcomes are at variance with expectations.

“The social costs of the reforms were substantially higher than anticipated, resulting in push-backs from the civil society. The economic management orthodoxy of market forces is being called into question in light of the social outcomes of the market-oriented reforms.

“There is a measured re-emergence of political economy with the reappearance of fuel subsidy and divergence in exchange rates.  This is evidently an economic management quandary that the new economic team must urgently manage.  And the CBN has a key role to play in this.

“Meanwhile, the CBN must ensure strategic and transparent intervention in the forex market to minimize volatility, as far as the reserves can support.

In addition to the I and E windows, creating an autonomous window in the banking system has become necessary where the currency can trade freely without any encumbrances.

“This is necessary to avert the diversion of remittances to other jurisdictions or the black market.  We cannot afford to live in denial at this time. The clearance of the backlog of forex obligations should be accorded high priority to restore the confidence of domestic and foreign investors.

“Again, another issue before the new CBN leadership is deepening the financial intermediation role of the deposit money banks, which is their primary role in an economy.

“This responsibility entails the mobilization of financial resources from the surplus end of the economy to the deficit segment of the economy.  Financial conditions remain very tight for the private sector amid challenges of access and cost of credit.

“Banking system credit to the private sector in Nigeria, as of 2022, was a mere 20.6 percent of the nation’s GDP, as sub-Saharan average of 28 percent and global average of 145 percent.

“Besides, small businesses, which account for an estimated 50 percent of the GDP, have access to just about one percent of the credit in the banking system.  The implication is that the banking system is still largely disconnected from the investing community, especially the small businesses in the economy.

“The financing gap in the small business space has been estimated at over N600 billion. This anomaly needs to be corrected.  All these underscore the need to deepen synergy and complementarity between the banking system and the economic players, especially the MSMEs.

“The key metrics of the depth of the financial system include the ratio of financial assets to GDP, the ratio of deposit liabilities to GDP, and the ratio of the money supply to GDP.  Nigeria’s rating on account of these ratios is still very low compared to other emerging economies.

“Therefore, deepening the financial system for stability is very critical. There is a need to reduce the ratio of non-interest income as a percentage of income of banks. The ratio was 42.5 percent two years ago and would have gone up by now, given the numerous headwinds confronting investors in the economy.

“In most developing economies, the ratio is less than 30 percent. This income structure is a reflection of the failure of financial intermediation in the economy.  This therefore needs to be addressed.

“The core function of the banking industry is financial intermediation. A situation where non-banking activities crowd out the financial intermediation functions of the deposit money banks is detrimental to the economy’s growth.

“Also, the new CBN leadership needs to look at the efficiency of the financial system. The spread between deposit and lending rates in the Nigerian banking system is too high.  It is an indication of serious efficiency issues in the banking system.

“In Nigeria, the spread is over 20 percent, one of the highest globally. The average for sub-Sahara countries is 10 percent, and the global average is about 6.6 percent. The large spread is detrimental to investment growth and disincentive to savings.

“Also, the minimum capital requirements of the banking industry need to be reviewed in the light of the considerable loss of value amid depreciating domestic currency.

“During the banking consolidation exercise of 2004, the minimum capital requirements for banks were raised from N2 billion to N25 billion.  The revised capital requirement was an equivalent of $187 million.

Today, the same N25 billion is equivalent to just $32.5 million.  This is a clear indication of the phenomenal erosion of the capital base of the banks.

“Recapitalization of the banks has therefore become imperative.  It is important to ensure that the capital base of banks can support their current exposures in the interest of the financial system’s stability.

“The naira redesign policy should be suspended indefinitely.  It should not be a priority at this time.  There was really no compelling argument to undertake the naira redesign in the first place. However, the momentum for the cashless economy should be sustained without resorting to the crude methodology of cash confiscation adopted by the previous dispensation in the CBN.

“The approach was very disruptive and inflicted unbearable hardships on businesses and the citizens.  Economic activities need not be disrupted to achieve a reduction in cash transactions in the economy.

“Indeed, Nigeria has one of the best rankings in cash dominance metrics. Cash as a percentage of GDP in Nigeria is one of the lowest globally at less than 2 percent.  For many other developing countries, the percentage is as high as 10 percent.

“The tenure of funds in the country’s banking system is extremely short.  Over 85% of deposits in the banking system are less than one year tenure.  This maturity structure of funds cannot support economic growth.

“What it means is that our banking system cannot support long-term investment. Doing so will result in a serious mismatch of tenure, which could pose a risk to the banks’ stability.

“In 2021, the banking industry recorded a negative asset-liability mismatch of N45.6 trillion, according to the NDIC.  This is not healthy for the banking system and the economy. This is why there has been a dominance of development finance in the economy.  Such intervention funds have vulnerabilities that could create challenges for the economy.

“There is a need to address the macroeconomic fundamentals to correct this maturity structure of funds in the banking system. The lending rate in the economy is very high and detrimental to investment and economic growth. SMEs pay as high as 30 percent interest on loans.

“For non-bank financial institutions, the rates are even more atrocious.   This is not conducive to investment growth and job creation.  Bringing down interest rates will require a mix of monetary and fiscal policies.

“Furthermore, steps should be taken to reduce concentration risks in the banking system as a strategy to manage systemic threats to the bank system.  The top ten banks account for over 80 percent of bank assets, total loans, and deposit liabilities.  This structure poses systemic vulnerability risks.  “Better spread of assets and liabilities in the banking system is desirable.

“The CBN governor needs to relate well with stakeholders, both in the public and private sectors.  This is without prejudice to its autonomy or regulatory effectiveness.  Such collaboration would enrich the quality of monetary policy through beneficial feedback and empirical content.  It will also provide insights into the peculiarities of the economy.  “The CBN should not have a territorial mindset.  It should be ready to engage with other ministries and agencies whose activities impact on investment environment. It is gratifying that the administration has put in place a policy coordination framework with the designation of a coordinating minister for the economy.

“The CBN governor must observe the high standards of corporate governance to preserve the credibility and integrity of the apex bank.  There should be a level playing field for all operators in the financial sector.  “Regulatory process must be transparent, fair, equitable and…