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CPPE urges new CBN gov to prioritise clearing forex backlog

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The Centre for the Promotion of Private Enterprise (CPPE) has issued a call to the newly appointed Governor of the Central Bank of Nigeria, Olayemi Cardoso, urging him to prioritize the resolution of the backlog of forex exchange obligations. This appeal was made in a press statement titled “Ten Point Agenda For The CBN Governor,” which the non-governmental organization released on Sunday.

Muda Yusuf, the Managing Director of CPPE and the signatory of the statement, emphasized the importance of addressing the backlog of forex obligations to restore the confidence of both domestic and foreign investors. Additionally, he urged Cardoso to implement policies aimed at enhancing stakeholder engagement and improving the efficiency of the financial system.

The statement highlighted that on Friday, the naira reached its lowest point at N995 against the U.S. dollar due to heightened demand and insufficient supply in the forex market. In response, Yusuf suggested that, in addition to the existing Investor and Exporter FX exchange window, the new CBN management team should establish an autonomous window within the banking system where the currency can trade freely without restrictions. This move would help reduce the incentive to sell remittances in the street FX market, commonly known as the black market.

Yusuf also pointed out the need to deepen the financial intermediation role of deposit money banks, emphasizing that they should play a more significant role in mobilizing financial resources from surplus areas of the economy to deficit segments. He noted that credit conditions for the private sector remain tight, particularly concerning access and the cost of credit. Banking system credit to the private sector in Nigeria as of 2022 stood at a mere 20.6 percent of the nation’s GDP, significantly lower than sub-Saharan and global averages.

Furthermore, Yusuf called for addressing the efficiency of the financial system, particularly the high spread between deposit and lending rates in Nigerian banks, which indicates significant efficiency challenges. He noted that the large spread, over 20 percent in Nigeria, is one of the highest globally and has a detrimental effect on investment growth and savings incentives.

In conclusion, Yusuf urged the new CBN Governor to oversee the recapitalization of banks, emphasizing the need to correct these anomalies and improve the synergy and complementarity between the banking system and economic players, especially small businesses.

The statement highlighted that during the 2004 banking consolidation exercise, the minimum capital requirement for banks was raised from N2 billion to N25 billion, equivalent to $187 million at the time. However, today, the same N25 billion is equivalent to just $32.5 million, indicating a significant erosion of the banks’ capital base. Consequently, recapitalization of the banks has become necessary to ensure that their capital can adequately support their current exposures and maintain financial system stability.

Regarding ways to finance the fiscal deficit, the advice is to keep it within statutory limits to avoid the detrimental effects of high-powered money on the macroeconomic environment, preventing a repeat of the experiences of the last few years.

Regarding the naira redesign policy, the recommendation is to suspend it indefinitely as it is not considered a priority. The policy lacks a compelling rationale, and the momentum for a cashless economy should be sustained without resorting to previous methods of cash confiscation.

On the tenure and cost of funds in the banking system, the suggestion is to address macroeconomic fundamentals to correct the maturity structure of funds in the banking system. High lending rates, especially for SMEs and non-bank financial institutions, are hindering investment and economic growth. Lowering interest rates would require a combination of monetary and fiscal policies.

Concerning concentration risk in the banking sector, the advice is to take steps to reduce it, as a situation where the top ten banks account for 80 percent of bank assets, total loans, and deposit liabilities poses systemic vulnerability risks. A better distribution of assets and liabilities across the banking system is desired.

Regarding stakeholder engagement, the new CBN leadership is encouraged to engage effectively with stakeholders in the public and private sectors, fostering collaboration with other ministries and agencies that impact the investment environment, rather than maintaining a territorial mindset.

Finally, the recommendation is to uphold high standards of corporate governance to preserve the credibility and integrity of the apex bank. The CBN should maintain transparency, fairness, equity, and firmness in its regulatory processes and avoid involvement in partisan politics.

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