Connecting the Dots: How CBN’s FX Reserves, Naira’s Weakness, and Oversight Collide
The Central Bank of Nigeria (CBN) is the apex monetary authority of the country, responsible for managing the nation’s currency, foreign exchange reserves, and monetary policy. The CBN also acts as the lender of last resort and the banker to the federal government and other financial institutions.
One of the key functions of the CBN is to maintain the stability of the naira, the national currency, against other currencies, especially the US dollar. The CBN does this by intervening in the foreign exchange market, buying or selling foreign currencies to influence the exchange rate of the naira.
The foreign exchange reserves are the stock of foreign currencies and assets that the CBN holds to conduct its interventions. The CBN obtains its foreign exchange reserves from various sources, such as oil exports, foreign loans, foreign investments, remittances, etc. The CBN also owns and controls the level and use of foreign exchange reserves.
However, in recent years, the CBN has faced several challenges in managing its foreign exchange reserves and stabilizing the naira. One of these challenges is the alleged printing of naira notes by the CBN to finance the federal government’s budget deficit.
According to some reports, the CBN printed about N23 trillion between 2015 and 2020 to fund various government expenditures, such as salaries, subsidies, debt servicing, infrastructure projects, etc. This amount is equivalent to about $47 billion at the current exchange rate of N469 per dollar.
CBN printed N23t, which made the Naira lose value, then the same CBN used foreign reserves to prop up the Naira they were weakening.
The printing of naira notes by the CBN has several negative consequences for the economy and the currency. First, it increases the money supply in circulation, which can lead to inflation. Inflation is the general rise in prices of goods and services over time. It erodes the purchasing power of money and reduces the value of savings. According to the National Bureau of Statistics (NBS), Nigeria’s inflation rate reached 22.79% in June 2023, the highest level since 1996.
Second, it reduces the demand for foreign exchange by the government, which can lead to currency depreciation. Currency depreciation is the fall in the value of one currency against another. It makes imports more expensive and exports cheaper. It also affects the balance of payments, which is the record of transactions between a country and the rest of the world. According to data from abokiFX, a website that tracks parallel market rates, Nigeria’s exchange rate depreciated from N199 per dollar in 2015 to N469 per dollar in 2021.
Third, it reduces the credibility and transparency of the CBN and its monetary policy. The printing of naira notes by the CBN is supposed to be a temporary measure to address short-term liquidity problems or emergencies. However, it seems that it has become a regular practice to finance recurrent expenditures or political agendas. This raises questions about the independence and accountability of the CBN and its governor. It also violates Section 38 of the CBN Act of 2007, which limits the amount of advances that the CBN can grant to the federal government to 5% of its previous year’s revenue.
The printing of naira notes by the CBN also undermines its efforts to stabilize the naira by using its foreign exchange reserves. The CBN has been using its foreign exchange reserves to intervene in the market and defend the naira against depreciation. However, this strategy has proven costly and unsustainable, as it depletes the reserves and exposes them to external shocks.
Read Also: CBN Says It Has Little or No Control Over Price of PMS or Dollar
According to data from Trading Economics, Nigeria’s foreign exchange reserves declined from $43.6 billion in January 2020 to $34.8 billion in July 2021. This represents a drop of 20% in 18 months. The decline in reserves also affects Nigeria’s ability to service its external debt, which stood at $36.5 billion as of March 2021.
Who should have provided oversight on the printing of naira notes by the CBN?
The printing of naira notes by the CBN should have been subject to oversight by the National Assembly and the Debt Management Office (DMO).
The National Assembly is the legislative arm of the federal government, responsible for making laws and approving budgets. The National Assembly should have scrutinized the sources and uses of the funds that the CBN printed for the government and ensured that they were aligned with the fiscal policy and the national development plan. The National Assembly should have also exercised its oversight powers to check the excesses and abuses of the executive branch and held the CBN governor accountable for his actions.
The Debt Management Office is the agency that coordinates the management of Nigeria’s public debt, both domestic and external. The DMO should have monitored the impact of the printing of naira notes by the CBN on the public debt profile and advised the government on the optimal level and composition of the debt. The DMO should have also ensured that the borrowing and repayment of the advances from the CBN were done in accordance with the relevant laws and regulations.
