…Going forward, CBN is targeting 15 per cent inflation in 2025 and has also projected a 4.17 percent growth in GDP, which is above the 3.2 percent growth forecast by the International Monetary Fund( IMF)
By Arize Nwobu
THUR JAN 23 2025-theGBJournal| Central banks are at the heart of the economy and they evolve monetary policies to keep a nation’s currency and economy stable.
But it has been observed that central banks are often misunderstood in their efforts to heal the economy.
That is why PwC noted that central banks need to communicate efficiently and effectively to strengthen understanding of their objectives and to create a proper perception and positive public sentiment, especially in times of stress.
The Central Bank of Nigeria( CBN) has continued to drive its vision and mission and evolving policy options which aims at healing the economy even in the face of daunting challenges.
The present CBN management assumed office at a critical period and inherited complex challenges arising from the failed naira redesign policy of the previous management, growing inflation and volatile exchange rate.
CBN Governor, Olayemi Cardoso made an impressive presentation when he unveiled his vision at the Senate screening.
He admitted the enormity of the challenges, but reassured and expressed optimism that they would evolve policy actions to improve the economy and enhance public perception of the Bank.
Cardoso is a banker, chartered stockbroker and public policy expert and holds a Masters degree in Public Administration, at the Harvard Kennedy School of Government( HKS), USA.
He had been the Chairman, Citi Bank Nigeria for twelve years and former Commissioner for Economic Planning and Budget, Lagos State.
On assumption of office, the Governor was decisive and hit the ground running with his team. He rolled back the operating frontiers of CBN to enhance focus, minimise wastages and increase efficiency.
He refocused CBN to using orthodox monetary policy tools and separated the formerly blurred line between monetary policy and fiscal policy.
CBN was refocused on its primary functions of determining interest rate, directing money supply to achieve stability, formulating monetary policy, managing foreign reserves, advising the federal government etc.
Cardoso inherited and continued with the new unified and free floating exchange rate regime adopted by the former Acting Governor, Mr Folashadun Shonubi.
The choice of foreign exchange regime adopted by central banks is very germane and can make or mar the economy.
As noted by Professor Mike Obadan, former Director, Nigerian Centre for Economic Management and Administration, Ibadan, the choice of exchange rate was of crucial importance for self protection against speculative attacks.
While the World Bank supported the free floating exchange rate, some analysts noted that it could trigger currency crisis. The naira plunged to N945/ USD1 after the adoption of the free floating exchange rate regime.
According to experts, some of the advantages of the free floating exchange rate include the potential to attract foreign investments, ability of currency value to adjust naturally to economic changes, and the lack of necessity for the central bank to hold large foreign reserves.
The disadvantages include currency risk due to volatility of exchange rate, encouraging speculation, and the potential to worsen economic problems if the economy is struggling.
The exchange rate is a major economic variable which determines trade and capital flow and health of the economy.
Factors that affect exchange rate include the production and export of goods and services. Imports and exports influence the exchange rate, thus the need for a country to balance imports and exports.
Forex management has always been a challenge. The structural imbalance of the economy and the activities of currency speculators are some of the major causes of the challenge and which could sometimes degenerate into a crisis situation.
Currency speculation creates a destabilising impact and undermine real economic growth because it is not backed by an underlying activity, but solely driven by the motive to make huge profits from currency moves.
Speculators exploit the weakness of a currency and create destabilising impact. They sell a currency when it is weak and expect it to get weaker, or buy it when the price rises in anticipation that it would rise more.
CBN has continued to introduce different and creative policy options to stabilise the exchange rate. In the past, the Bank had used a sustained injection of dollars into the FX market to stabilise the naira.
In the recent past, the Bank launched the Price Verification System( PVS) portal for importers and exporters buying foreign currencies. The PVS provided details of how customers can acquire foreign currencies and at what rate.
CBN had also directed Bureaux de Change ( BDC) to trade foreign currencies at similar rates that obtained in the Importers and Exporters'( I&E) Window to improve the efficiency of the FX market.
In December, 2024, CBN introduced the Electronic Foreign Exchange Matching System( EFEMS), an online platform for matching buy and sell orders for foreign exchange transactions.
EFEMS was test- run for two weeks before it became operational and it aims to reduce speculative activities and distortions, and enable real-time price discovery in the FX market.
Reportedly, EFEMS seems to have reduced the volatility of the naira.
On inflation, CBN adopted an explicit inflation targeting framework to enhance the effectiveness of the monetary policy.
Going forward, CBN is targeting 15 per cent inflation in 2025 and has also projected a 4.17 percent growth in GDP, which is above the 3.2 percent growth forecast by the International Monetary Fund( IMF).
CBN has confidently implemented its policy options and it is expected that they will achieve the desired results though, sometimes it takes a long time for monetary policies to have the desired effects.
Nwobu, a Chartered Stockbroker and Business Journalist, wrote via arizenwobu@yahoo.com Tel: 08033021230.
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