The Central Bank of Nigeria (CBN) has been urged to refrain from intervening in the foreign exchange market through forex auctions.
It was also advised to continuously reaffirm the commitment to exchange rate flexibility by adopting a comprehensive, systematic, and transparent framework for foreign exchange interventions.
The policy advisory issued by the World Bank was included in the Nigeria Development Update, offering recommendations to stabilise the naira against foreign currencies.
On August 26, 2024, the CBN auctioned $876.26m to end users via a retail Dutch auction, a major move away from its traditional sales of foreign exchange to Bureau De Change operators.
This auction marked one of the most significant FX interventions by the CBN under the leadership of Governor Yemi Cardoso, who has been actively working to stabilize the naira and address the ongoing volatility in the FX market.
The apex bank said the auction process was to enhance foreign exchange liquidity in the market, alleviate demand pressure, and support price discovery in alignment with its objectives.
According to the sales report, 3,347 firms got access to the dollars via the 26 banks, which qualified at the rate of N1,495 per dollar cut-off rate.
But the Bretton Woods Institution in its latest report noted that permitting market participants to trade FX with more flexibility across time would also contribute to deepening the FX market.
The report read, “Exchange rate policy should continue to be geared towards maintaining a unified, market reflective exchange rate, whilst deepening the FX market. The CBN should continue efforts towards deepening the official FX market, including by facilitating formal remittances inflows, allowing international oil companies to fully concentrate their FX sales in the official market, restoring intermediated market access to bureaux de change, and refraining from ad-hoc FX auctions.
“Allowing market participants to trade FX with more flexibility across time would also contribute to deepening the FX market.”
Additionally, the bank noted that there should be efforts to build foreign reserves strategically in order to more accurately determine the fair value of the naira against foreign currencies, ensuring a stable and predictable economic environment that supports both domestic and international trade.
“In addition, continuously reaffirming the commitment to exchange rate flexibility, adopting a comprehensive, systematic, and transparent framework for CBN FX interventions, and building reserves would contribute to anchoring exchange rate expectations to fundamentals rather than to perceived targeted rate levels. Maintaining the single, market-reflective exchange rate is crucial to increase fiscal revenues (from oil and taxes on other export-related profits, customs, and VAT on imports), attract investment, build external reserves, and, in turn, set the conditions for investment and inclusive growth.”
It remains to be seen if the apex bank will adhere to the recommendations.
