The Cardoso Naira vs Dollar Chess Game: A Fight To The Finish

By Michael Chibuzo

I have watched very keenly the flurry of activities in Nigeria’s foreign exchange market in the past couple of days. It is obvious that the Central Bank of Nigeria under the leadership of Dr. Yemi Cardoso has laid down a monetary chess challenge with the dollar and operators of Nigeria’s foreign exchange market.

On 22nd September, 2023, Dr. Yemi Cardoso assumed office as the new Governor of the Central Bank of Nigeria. For two months, he did not make any key statement on the policy direction of the CBN until November 24, 2023 when he laid out what may be described as his first monetary policy speech at the 58th Chartered Institute of Bankers of Nigeria’s annual dinner in Lagos.

The key takeaways from Cardoso’s speech at the dinner as it affects the Nigerian economy include the following:

– There is a continuous decline in Nigeria’s crude oil production, which has led to a decline in government revenue and foreign exchange inflows;

– There is a growth in public expenditures to meet up with the required pace of growth. The combination of INCREASED public expenditure and REDUCED net public revenue led to fiscal deficit and public debt increase, placing additional strain on external reserves and contributing to exchange rate instability;

– Insecurity remains a pressing issue, affecting the agricultural, industrial, and services sectors simultaneously. The net effect is reduced national productivity, food shortages and inflation; and

– Unavoidable fuel subsidy removal and foreign exchange unification policy exacerbated a worsening macroeconomic indicators.

So, in essence, Cardoso highlighted significant challenges facing the economy to include high and rising inflation, inadequate foreign exchange supply, depreciation of the exchange rate, limited external reserves, weakened output, and high unemployment.

He said that the CBN will prioritize price stability to safeguard the livelihoods of Nigerians (ie tackling inflation) as well as stabilizing the exchange rate. These two areas if achieved will promote economic stability. The big question was always HOW.

The first thing Cardoso sought to do (in his words) was “to build back a better CBN” that had been painted in bad light over the past few years due to various factors such as corporate governance failures, diminished institutional autonomy of the CBN, a deviation from the core mandate of the CBN, unorthodox use of monetary tools, an inefficient and opaque foreign exchange market that hindered clear access, a foray into fiscal activities under the cover of development finance activities etc.

From the look of things, it was obvious that Cardoso was ready to make audacious policy u-turns from what was obtainable in the CBN. Strangely, he decided to bid his time before holding a Monetary Policy Committee meeting (last one was held in July, 2023). Obviously he wanted to clear the monetary table of a lot of ‘debris’ before constituting an MPC meeting.

The volatility and lack of adequate liquidity in the foreign exchange market (which had earlier been liberalised) posed the most immediate challenge to Yemi Cardoso and he understood the implications for businesses and investors. This is why it appears he took it up as his topmost priority.

At that CIBN dinner, Cardoso said, “in order to ensure the proper functioning of domestic and foreign currency markets, CLEAR, TRANSPARENT, and HARMONISED rules governing market operations are essential. New foreign exchange GUIDELINES and LEGISLATION will be developed, and extensive CONSULTATIONS will be conducted with banks and FX market operators before implementing any new requirements.”

On January 22nd, the CBN fixed February 26 – 27 as dates for its 293rd Monetary Policy Committee meeting – the first since Cardoso was appointed more than four months ago.