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HomeBanking & Finance$7b FX backlog clearance sharpens banking sector stability

$7b FX backlog clearance sharpens banking sector stability

The clearance of $7 billion forex backlog comes with significant impact on the stability and resilience of the financial system. The move, analysts said will not only the direction of foreign capital flows to the economy but will contribute significantly to exchange rate stability.

Under the leadership of Governor Olayemi Cardoso, the Central Bank of Nigeria (CBN) last week announced the successful clearance of a $7 billion backlog in foreign exchange transactions.

This accomplishment fulfills Cardoso’s commitment to addressing the backlog, with efforts dedicated to settling outstanding transactions.

The CBN also reported a significant boost in external reserves, reaching $34.11 billion, the highest level in eight months, driven by remittances from Nigerians abroad and increased purchases of local assets by foreign investors.

The value of the Naira to the dollar appreciated by 10.69 per cent to print at N1431.49/$ this week at the Nigerian Autonomous Foreign Exchange Market Window.

Independent auditors from Deloitte Consulting verified the legitimacy of each transaction, ensuring that only valid claims were honored.

In emailed report to investors, Investment research Associate at Comercio Partners, Ifeanyi Uba, said the clearance of the backlog aligns with the CBN’s strategy to stabilize the exchange rate, mitigate imported inflation, and enhance confidence in the banking system and economy.

He said: “Cardoso underscored the significance of this action in restoring credibility and confidence in Nigeria’s economy, signaling a positive stride towards a more resilient and stable financial landscape, thereby fostering confidence among investors and businesses”.

A member of the Monetary Policy Committee (MPC), Aku Odinkemelu, said the  Nigerian financial system is resilient as the banking sector remains sound and stable.

“Total assets of the banking industry increased month-on-month by 24.76 percent between December 2023 and January 2024.The banking industry Capital Adequacy Ratio (CAR) remained above the minimum threshold of 10–15 percent. Similarly, the Liquidity Ratio (LR) remains above the regulatory threshold of 5 percent and 30 per cent, respectively,” she said.

According to her, the industry NPL ratio of 4.15 per at end-January 2024, which is itching towards the industry regulatory threshold of 5 percent should be monitored closely.

“Given that most banks had CRR above the regulatory threshold of 32.50 percent and the industry average of 39.36 per cent at end-January 2024, I vote to raise CRR by 750 basis points. I am also aware that tightening of money supply will lead to increased borrowing costs for businesses, with consequences for both the bad debt portfolio of banks and the risks. I am, however, confident that the Bank’ supervisory tools are robust to address risks arising from monetary policy tightening,” she said.

On his part, another MPC member, Lamido Yuguda, said rising inflation and exchange rate depreciation are self-reinforcing, as an increase in inflation exacerbates the depreciation of the exchange rate via increasing interest rate differentials, while the deterioration of the exchange rate worsens inflation through the pass-through effect.

According to him, the naira has depreciated by over 66 per cent as a result of the policy switch to a more flexible exchange rate system.

“This was nurtured and worsened by the excess liquidity in the banking system as indicated by the marked increase in reserve money and broad money over the last one year. With the depreciation of the Naira, another concern is bank asset quality,” he said.

He explained that while the banking system remained resilient during the review period, with capital adequacy, liquidity and non-performing loan ratios all within normal prudential limits. It was therefore very necessary that policy action be taken to slow and reverse the implied undervaluation of the naira.

Other analysts discussed the Federal Reserve decision to hold its key interest rate steady for the fifth consecutive meeting, choosing to await further data before contemplating any rate cuts.

Despite grappling with persistent challenges posed by high inflation, Fed Chair Jerome Powell emphasized that reducing borrowing costs is not currently under consideration. Nevertheless, market anticipations hint at a potential rate reduction in the summer.

Uba said: “Fed officials are carefully assessing the risks associated with timing a rate cut, recognizing its critical importance. While economic forecasts indicate a less aggressive approach to rate cuts in the upcoming years, robust economic growth is expected”.

“Concerns persist regarding inflation, particularly within the housing and services sectors, prompting a cautious stance. The Fed remains in a “wait-and-see” mode, prioritizing confidence in inflation returning to its target despite the strength observed in job growth and consumer spending. Uncertainties linger regarding inflation and future adjustments to monetary policy”.

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