CBN tweaks strategy to shore up dollar supply, boost flagging economy

AFTER five years of ignoring calls to jettison the demand management foreign exchange (FX) strategy, the Central Bank of Nigeria (CBN) has finally embraced the supply policy to shore up dollar supply and rejuvenate an ailing economy.

A demand management FX strategy focuses on controlling demand for dollars while a supply policy involves boosting dollar supply through a series of official pronouncements and policies.

The CBN, on March 5th, introduced ‘Naira 4 Dollar Scheme’ for diaspora remittances–a strategy that was targeted at boosting FX supply in a dollar-strapped economy.

In a circular signed by A.S. Jubrin, director of Trade and Exchange Department at the CBN, the apex bank said it would, through commercial banks, pay 5 naira for any one dollar remitted by sender and collected by a designated beneficiary.

“This incentive is to be paid to recipients whether they choose to collect the USD as cash across the counter in a bank or transfer same into their domiciliary account,” the CBN’s circular said.

“In effect, a typical recipient of diaspora remittances will, at the point of collection, receive not only the USD sent from abroad but also the additional N5 per USD received,” the bank noted.

CBN explained that it had discussed the modalities with banks and international money transfer operators (IMTOs), disclosing that the scheme would take effect from Monday, March 8, and end on Saturday, May 8, 2021.

CBN Governor Godwin Emefiele

Why the strategy?

The CBN’s demand management strategy since 2015 has so far failed to shore up dollar supply in the Nigerian economy. The bank had restricted 44 items from milk to tomato concentrate from accessing FX through the official market.  It had also restricted open market operations (OMO) for  foreign portfolio investors. More so, the multiplicity of FX markets (which still exist) had worsened investor confidence.

As of October 2020, Nigeria’s foreign reserves were on a steep decline, though it was above 35 billion dollars. Worsening current account balance and declining oil prices ensured that manufacturers scrambled for dollars without success. With the economy in a  slump, the CBN was forced to project that the reserves would fall further to between 29.9 billion and 34.3 billion dollars. Several analysts knocked the apex bank for continuing an unsuccessful policy.

“Where we are today in Nigeria is a mentality of poverty. We are managing demand, whereas we should be looking at expanding supply. Nigeria must increase the supply side of her economy,” Doyin Salami, professor of economics and  chairman of the Presidential Economic Advisory Council, said at the opening day of the 26th edition of the Nigerian Economic Summit (#NES 26) held on November 23, 2020, in Abuja.

Read AlsoManufacturers identify dollar scarcity, cost of funds as biggest business impediments

With the failures of the CBN becoming apparent, the apex bank, a few days later, announced that it would allow diaspora remittances to be withdrawn in cash in a move to spur liquidity in the FX market and close the gap between the official FX rate and parallel/ black market rates.

This dollar management supply strategy worked as weekly remittances rose 500 percent, from five million to 30 million dollars as of February 2021, according to the CBN governor Godwin Emefiele.

cbn circular

Seeing the success of the policy, the apex bank introduced  ‘Naira for Dollar Scheme’ to further boost remittances and save the import-dependent economy from a total collapse. Economists say the policy would prevent routing dollars through informal and unofficial routes, which has been a practice for long.

Implication of the policy

The Nigerian economy went into recession in the third quarter of 2020 as GDP contracted in two consecutive quarters. Growth fell by 3.62 percent in Q3 of 2020 with major sectors in deep slump. COVID-19 was the biggest factor, but major economic policies such as exchange rate management and border management were flagged by analysts. Nigeria exited recession in the fourth quarter of 2020, with 0.11 percent growth which is not enough to bolster prosperity for a population growing at 2.6 percent per annum.



    Explainer: Why weekly dollar inflows into Nigeria rose by 500 percent

    The Nigerian economy is dollar-sensitive, being a monoproduct economy. With the incentive in remittances. there could be increased dollar supply, which would bolster growth. According to the Manufacturers Association of Nigeria (MAN), access to foreign exchange would help industries to have access to raw materials. This, in turn , would boost jobs and economic growth.

    The CBN’s short-term policy is far from being naira devaluation, but it is a type of currency modulation targeted at boosting foreign exchange inflows. However, analysts believe that boosting FX supply would also involve unifying the multiple exchange rate window.

    “Exchange rate unification is critical,” Jesmin Rahman, IMF mission chief for Nigeria, said at a virtual fireside interview participated by this writer in 2020.

    “Improve certainty and regulatory regime to help diversification, and turn a growing population into human capital,” she said.

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