Nigeria’s foreign exchange market has long been a critical component of its economy, influencing trade, investment, and the overall standard of living. The appointment of Yemi Cardoso as Governor of the Central Bank of Nigeria (CBN) in August last year marked a turning point in the country’s efforts to stabilize the naira amidst economic turbulence.
With innovative policies and decisive action, Cardoso has been instrumental in addressing some of the long-standing challenges in Nigeria’s forex market. Before Cardoso’s tenure, Nigeria’s forex market was characterized by multiple exchange rates, currency volatility, and persistent scarcity of foreign currency.
These issues were compounded by declining oil revenues, the country’s primary source of foreign exchange, and rising import bills. The parallel market thrived, creating a significant disparity between the official and black-market rates, which eroded investor confidence.
The apex bank was also faced with a backlog of over $7bn in unfulfilled commitments and a fragmented FX regime characterized by multiple forex rates, which had encouraged arbitrage opportunities.
This regime stifled much needed foreign investment and led to the depletion of the nation’s external reserves, which fell to $33.22bn in December 2023. The cost of the FX subsidy regime is estimated to far exceed that of fuel subsidies.
In 2022 alone, the potential revenue lost due to a less flexible FX regime was approximately N6.2tn, compared to N4.5 trillion from fuel subsidies. These funds could have significantly contributed to critical investments in education, healthcare, and infrastructure development.
Cardoso knew he had much job to do to achieve results. The starting point for him was to prioritize eliminating the multiple exchange rate system, a move aimed at fostering transparency and rebuilding confidence in the official forex market. By adopting a market-driven exchange rate, the CBN aligned the official rate with market realities, reducing arbitrage opportunities and enhancing the efficiency of forex allocation.
A cornerstone of Cardoso’s approach was rebuilding Nigeria’s foreign reserves to provide a buffer against external shocks.
He achieved this by tightening monetary policy, encouraging foreign investment inflows, and implementing measures to boost non-oil exports. These efforts helped stabilize the naira by ensuring the CBN could intervene in the market when necessary.
To reduce dependency on imports and ease pressure on forex demand, Cardoso supported policies that encouraged local production, particularly in agriculture and manufacturing. Incentives for businesses to source raw materials locally and invest in domestic industries began to bear fruit, lowering the import bill.
Leveraging technology, Cardoso introduced reforms to enhance transparency in forex transactions. The CBN adopted digital platforms to track and monitor forex allocations, ensuring accountability and reducing the influence of speculative trading.
Speaking at the annual Bankers award organised by the Chartered Institute of Bankers of Nigeria, Cardoso emphasized collaboration with key stakeholders, including commercial banks, exporters, and the government, to create a cohesive strategy for managing forex demand and supply. Regular communication and data-driven decision-making helped restore trust in the system.
The results have been significant. The unification of exchange rates reduced market distortions, while increased forex reserves enhanced the CBN’s ability to stabilize the naira. Furthermore, improved investor confidence has led to higher capital inflows, and the emphasis on domestic production has laid the groundwork for a more resilient economy.
Cardoso’s approach offers valuable lessons for other countries facing forex challenges. His blend of transparency, market-driven reforms, and strategic interventions demonstrates the importance of a well-coordinated and innovative policy framework in addressing complex economic issues.
He gave credence to this in his speech at the event when he said that the reforms that have been undertaken over the past year have been both challenging and essential.
He said, “Upon assuming office in October 2023, we prioritized reforms to rebuild Nigeria’s economic buffers and strengthen resilience. Inflation, which had surged to 27 percent, was one of the most pressing challenges, partly driven by excessive money supply growth.
“While our GDP growth had stagnated at a meager 1.8 per cent over the previous eight years, money supply expanded rapidly, averaging about 13 percent growth annually. This imbalance not only fueled inflation but also contributed to a significant depreciation of the naira.
“As we all know, inflation creates uncertainty for households and businesses, acting as a silent tax by eroding purchasing power and driving up living costs.
“The nation was also grappling with a fiscal crisis, marked by unsustainable deficit financing through the Central Bank’s Ways and Means advances, which had reached an unprecedented N22.7tn by 2023-equivalent to almost 11% of our GDP. In addition, quasi-fiscal interventions by the CBN, totaling over N10tn, undermined market confidence and weakened the effectiveness of our policy tools.
“These actions shifted focus away from our primary responsibility maintaining price stability. They compromised transparency by bypassing essential oversight mechanisms, which are vital for accountability. Moreover, they strained monetary stability, contributing to inflationary pressures and market distortions.
“Under my leadership, we have taken decisive steps to move away from these practices. We have ended years of fiscal deficits
financed through CBN’s Ways and Means advances, reinforcing our commitment to price stability and promoting fiscal discipline.”
To tackle the pressing challenge of inflation, he said the CBN acted decisively by raising the Monetary Policy Rate by 875 basis points to 27.5% in 2024-an essential move to contain inflation and restore stability.
“To borrow from Winston Churchill’s famous perspective: in our world, interest rates are undoubtedly the least desirable tool for combating inflation-except for all the others! I fully recognize the challenges that higher interest rates impose on businesses and families.
“However, these measures are not intended to be permanent. We are closely monitoring the data, and as inflation shows sustained signs of improvement-something we expect in the near future-we will adjust rates accordingly,” he added.
He stated further that the apex bank would sustain and enhance reforms aimed at strengthening economic buffers to withstand external shocks.
“Over the past year, we have undertaken critical reforms to unify Nigeria’s exchange rate, eliminating distortions and restoring transparency. This unification has enabled us to clear the outstanding foreign exchange obligations, giving businesses-ranging from manufacturers to airlines the confidence to plan and invest in the future.
“To further enhance the functionality of the foreign exchange market, we are introducing an electronic FX matching system, which has proven effective in other markets.
“It is vital to address the disinformation circulating about a supposed demand-supply gap in the FX market, which is fueling unnecessary panic. The current USD exchange rate reflects the price that the most desperate buyers are willing to pay, and this does not represent the true market value of the naira,” he added.
The introduction of the electronic matching system has corrected these distortions by enhancing the price discovery process. Additionally, it will significantly boost the Central Bank’s oversight and intervention capabilities, ensuring a more stable and transparent foreign exchange market.
While the Central Bank will continue to lay the foundation for price stability and foster a conducive policy environment, Cardoso said the role of banks in this journey is crucial.
According to him, an FX market is defined solely by when and how the Central Bank buys or sells dollars inadequate for the needs of a dynamic economy like Nigeria’s.
“Now is the time for banks to step up to their intermediation and market-making responsibilities, providing customers with the right solutions to run their businesses and manage risks effectively.
“We are not oblivious to the challenges of the past decade, including the japa of experienced professionals in the financial sector. This moment presents an opportunity to rebuild our competency framework, re-educate staff, and return to best practice training. Re-education is critical-concepts like ‘willing buyer/willing seller’ have been misinterpreted, and the market has forgotten that at least one counterparty in a transaction must be an authorized dealer.
“We must restore these standards and uphold industry ethics. We will also prioritize capacity development and continuous education at the CBN, which is home to many talented individuals,” he added.
He also said at the event that the ethics and professionalism of bankers and treasurers are under constant scrutiny, which is why we have introduced the FX Global Code for all authorized dealers and market participants.
He urge the CIBN to take the lead in upholding and demonstrating the highest standards in the industry, adding that the Central Bank has intensified surveillance of market activities to ensure compliance and eliminate bad actors who attempt to undermine the system.
“Together, we must build a market based on strong governance and transparency. As regulators, we will maintain a zero-tolerance approach to compliance violations.
“Our efforts to improve the functioning of our FX market are having the desired impact. Average daily turnover in the Nigerian Autonomous Foreign Exchange Market increased by 226 percent in the 1st half of the year when compared to the same period in 2023.
“Foreign portfolio inflows have increased by over 72 per cent during this period, while foreign exchange reserves have risen from $32bn in May 2023 to over $40bn today! This represents the equivalent of 17.5 months’ import cover and marks the highest reserve level in nearly three years,” he added.
He also said the forex market has also supported over $9bn in capital outflows over the past year as investors were able to freely repatriate capital and dividends without the need to wait for several months as experienced in the past.
These results reflect improved confidence in the reforms the CBN has embarked on. In addition, he said the CBN has witnessed a $6bn current account surplus in the first half of 2024 as a result of the impact of these reforms.
Reduction in petroleum product imports, he added, supported by improved domestic refining capacity, a growing focus on non-oil exports and higher remittance inflows has helped to support the positive current account balance.
Cardoso also added that an enabling policy environment has led to a doubling of monthly remittances from an average of $300m in September 2023 to nearly $600m in August 2024.
He added that the apex bank is committed to further integrating the Nigerian diaspora into its financial system, exemplified by the introduction of the non-resident BVN registration.
“We expect our financial institutions to develop products that not only enable the diaspora to support their families but also provide opportunities for savings and investment in Nigeria,” he noted.
The outcomes of these reforms clearly demonstrate impact in restoring investor confidence and laying a solid
foundation for long-term growth and competitiveness.