₦airaland Forum

The global credit rating agency, Fitch Ratings, recently upgraded its credit rating of Nigeria to B. Fitch said that the economic reforms have improved policy credibility and reduced near-term risks to macroeconomic stability.

But on top of the reforms list are the Central Bank of Nigeria (CBN)’s greater formalisation of FX activity, monetary policy tightening through a combination of policy rate hikes, prudential and operational tools like the open market operations to strengthen monetary policy transmission after years of financial repression.

The positive Fitch Ratings on Nigeria’s economy did not come as a surprise to stakeholders who have been keenly watching key economic policies from the monetary and fiscal authorities.

From exchange rate unification to reduce arbitrage in the markets, introduction of an electronic FX matching platform and a new FX code to enhance transparency and efficiency in the market as well as deployment of monetary policy tightening to keep inflation in check, the CBN has demonstrated commitment to achieving sustainable economic growth and exchange rate stability.

Already, the latest Fitch rating moved Nigeria’s long-term foreign-currency issuer default rating (IDR) from negative to stable, meaning that the country stands a better chance of attracting foreign investment, borrowing money on international markets at better interest rates, and boosting investor confidence.

Fitch also applauded the government’s commitment to policy reforms implemented since its move to orthodox economic policies in June 2023, including exchange rate liberalisation, monetary policy tightening, and steps to end deficit monetisation, as well as fuel subsidies removal.

“These have improved policy coherence and credibility and reduced economic distortions and near-term risks to macroeconomic stability, enhancing resilience in the context of persistent domestic challenges and heightened external risks,” the London-based agency stated.

FX Code/ EFEMS implementation — no turning back

The CBN recently took strategic steps to enhance transparency and boost market confidence with the inauguration of the Nigeria Foreign Exchange Code (FX Code) in Abuja. The FX Code has so far ignited naira stability at both official and parallel markets.

CBN Governor Olayemi Cardoso recently launched the FX Code, emphasising integrity, fairness, transparency, and efficiency as critical pillars for driving Nigeria’s economic growth and stability.

He emphasised that the FX Code was built on six core principles: ethics, governance, execution, information sharing, risk management and compliance, as well as confirmation and settlement processes.

These principles, he explained, aligned with international standards while addressing the unique challenges within Nigeria’s foreign exchange market.

According to Cardoso, “The FX Code represents a decisive step forward, setting clear and enforceable standards for ethical conduct, transparency, and good governance in our foreign exchange market. The era of opaque practices is over. The FX Code marks a new era of compliance and accountability. Under the CBN Act 2007 and BOFIA Act 2020, violations will be met with penalties and administrative actions.”

Beyond the foreign exchange market, the FX Code forms part of the CBN’s renewed focus on compliance across the financial sector. Its six guiding principles, alongside 52 sub-principles, were designed to become the benchmark for conduct across all participating institutions.

Issued as a guideline for the foreign exchange market, the FX Code is backed by the authority of the CBN Act of 2007 and the Banks and Other Financial Institutions Act (BOFIA) of 2020.

These legislative instruments empower the CBN to establish and enforce directives regarding the standards financial institutions must follow in conducting foreign exchange business in Nigeria.

Besides the FX Code, the apex bank also introduced the Electronic Foreign Exchange Matching System (EFEMS), which has proven effective in other economies in enhancing the functionality of the foreign exchange market.

The EFEMS was meant to check forex market distortions, eliminate speculative activities and instil transparency. The EFEMS, which is commonplace in developed and developing markets, offers real-time information on currency rates, trading volumes, and market activity.

Orthodox monetary policy decisions paying off

In February, the apex bank retained its benchmark lending rate at 27.50 per cent, marking the first time it has opted to maintain the rate in almost three years.

CBN had been persistent in raising the lending rates since March 2022, when the rate stood at 11.5 per cent.

The Monetary Policy Committee (MPC) of the bank stated that its unanimous decision was influenced by recent macroeconomic developments, which it noted with satisfaction.

These include stability in the foreign exchange market, leading to an appreciation of the exchange rate, and the gradual moderation in petrol prices, both of which are expected to positively impact price dynamics in the near to medium term.

The benchmark rate is the standard interest rate set by central banks, used to guide lending rates and influence economic activities, inflation, and financial stability. The central bank also retained the asymmetric corridor around the MPR at +500 to -100 basis points.

Cardoso said the committee voted to retain the Cash Reserve Ratio (CRR) at 50 per cent for commercial banks, while maintaining the CRR of merchant banks at 16 per cent.

The committee also voted to retain the liquidity ratio at 30 per cent. The CBN has continued tightening monetary policy to curb inflation, implementing a series of interest rate hikes throughout 2024. These decisions were aimed at stabilising the economy amid persistent price pressures.

In 2024, the bank raised rates six times, delivering a cumulative increase of 875 basis points. “The committee highlighted the benefits of the improvements in the external sector to exchange rate stability, including the convergence of rates between the Nigerian foreign exchange market and the Bureau to change and urge the bank to relent, not to relent in its effort to boost market liquidity,” Cardoso said.

Fitch expects sustained macroeconomic stability

Fitch expects the macroeconomic policy stance to support the move to lower inflation and sustain improvements in the foreign exchange (FX) market’s operation, though it will likely remain much higher than rating peers.

It also expects “a continued reduction in external vulnerabilities through further easing of domestic FC supply constraints, while renewed energy sector reforms should help sustain current account surpluses”.

It added: “Greater formalisation of FX activity including the Central Bank of Nigeria’s (CBN) recent introduction of an electronic FX matching platform and a new FX code to enhance transparency and efficiency, along with monetary policy tightening, has led to a greater rise in FX liquidity and general stability in the FX market after a 40% depreciation in 2024, closing the spread between the official and parallel exchange rates.

“Net official FX inflows through the CBN and autonomous sources rose by about 89% in 4Q24, compared to an 8% rise in 4Q23. We expect continued formalisation of FX activity to support the exchange rate, although we anticipate modest depreciation in the short term.”

Reacting to the Fitch rating, Oladele Adeoye, chief rating officer at DataPro, a Nigerian credit rating agency, said it was a positive development “in all ways.”

Adeoye said it would boost investors’ confidence in Nigeria’s Eurobond as people would readily subscribe whenever it is issued.

“Good rating also implies lower cost of funds. Of course, there will be an inflow of foreign currency into the economy, and this will give further room for the CBN to support the local currency and strengthen the exchange rate,” he said.

Addressing how the government can improve on this, Adeoye said: “Nigeria must increase productivity that can boost exports and lower imports. This will enhance the external reserve and improve public finance.

“We need to continue to improve our revenue base, and this includes both oil and non-oil revenue.”

Chris Onalo, registrar/CEO, Nigeria Institute of Credit Administration (NICA) Chartered, the national body for credit management, said the Fitch rating “means a lot.”

He said he could not agree less with the agency’s rating. “It is solid, it is stable, it is progressing, and it has a future outlook,” Onalo said.

“The government should focus on expanding the economy. In other words, all-inclusive economic activities fix the infrastructural problem, because that will stimulate future ratings.

“It should also reduce the cost of doing business drastically. And then fix electricity and clamp down on the local insecurity, like the insurgency is becoming a thing of the past now, but pocket pickers, people that break into offices, and you can arrest that by creating avenues for jobs, wider job availability for people that are regarded as forgotten miscreants.”

He said the Fitch Ratings shows that the country has a stable outlook in terms of investment and has a positive effect on Nigeria’s foreign direct investments.

One of the major implications of the improved rating is that Nigeria may now be able to borrow at lower interest rates.

The Fitch Ratings is also expected to allow the federal government to finance projects more efficiently and manage its debt burden more effectively and further send a signal to the global community that Nigeria’s economy is on a more stable footing, which could in turn boost international confidence in the country’s financial environment.

Additionally, the new rating could offer Nigeria better access to international financial markets, thereby increasing funding options for both the public and private sectors.

OkCornel:
Yet the standard of living of the average Nigerian continues to deteriorate.

https://www.nairaland.com/8379963/grok-analysis-standard-living-under#134703167

bigwig10:
How does this impact the life of common nigerian, that should be the major concern...

OkCornel:
Yet the standard of living of the average Nigerian continues to deteriorate.

https://www.nairaland.com/8379963/grok-analysis-standard-living-under#134703167

Antichristian2:


We go get there!

Just that most Nigerians are greedy!

Rice don come down to less than 60k but them still dey sell one spoon for N500!

And those CBEX maga will be hoping to recoup their loss from their remaining business!

Those using CNG vehicles are charging same fares as those using petrol!

Never4getU:
Mugu! The better economy u're japainto do u know how long hardship the had to endure before it became a destination for ur Japa syndrome?

bigwig10:
How does this impact the life of common nigerian, that should be the major concern...

DesChyko:
So, in your opinion, you have not suffered long enough to get the country of your dreams right?

It is this defeatist mentality that keeps people sinking into poverty.

Never4getU:
Mugu! The better economy u're japainto do u know how long hardship the had to endure before it became a destination for ur Japa syndrome?

Never4getU:
Mugu! The better economy u're japainto do u know how long hardship the had to endure before it became a destination for ur Japa syndrome?

OkCornel:
Why are slaves passionate in defending their slave masters desperately?

Nigerians have no reason to suffer hunger and hardship. All these things are self inflicted by the sellouts who call themselves your leaders

OkCornel:
Why are slaves passionate in defending their slave masters desperately?

Nigerians have no reason to suffer hunger and hardship. All these things are self inflicted by the sellouts who call themselves your leaders

OkCornel:
Why are slaves passionate in defending their slave masters desperately?

Nigerians have no reason to suffer hunger and hardship. All these things are self inflicted by the sellouts who call themselves your leaders

ivandragon:
I honestly don't understand these guys. It seems that they do not want anyone pointing out issues. They did same for buhari and look at were Nigerians are today.

Even when it is glaring that the issues they point to are more beneficial to foreigners than the nationals, they still parrot it as achievement. Achievements that worsen the plight of the masses.