The Central Bank of Nigeria (CBN) is set to adopt an explicit inflation-targeting framework to enhance the effectiveness of its monetary policy.
The Governor, Central Bank of Nigeria (CBN), Mr. Olayemi Cardoso who disclosed this in Lagos while unveiling his policy direction at the Chartered Institute of Bankers of Nigeria (CIBN) bankers’ night, said that the details and requirements for this framework are currently being finalized alongside the fiscal authorities.
He said the CBN will provide forward guidance, enhance transparency, and maintain effective communication with the public to anchor expectations and build trust among stakeholders.
He said under the economic agenda of President Bola Ahmed Tinubu’s administration, the government has set an ambitious goal of achieving a Gross Domestic Product (GDP) of $1.0 trillion over the next seven years, with clearly defined priority areas and strategies. He said attaining this substantial target necessitates sustainable and inclusive economic growth at a significantly higher pace than current levels. The administration has already commenced this journey through fiscal reforms, including the removal of petrol subsidy and the unification of the foreign exchange market rate.
On achieving President Bola Tinubu’s Agenda, he said Nigerian banks do not have sufficient capital in servicing a $1.0 trillion economy in the near future.
He said the first step to be taking by the CBN will be directing banks to increase their capital while technology will continue to play a critical role in delivering financial services and enhancing financial inclusion.
“Therefore, we must make difficult decisions regarding capital adequacy. As a first step, we will be directing banks to increase their capital,” he added.
He stated that from his observation some licensees are operating outside the approved activities, breaching the boundaries set for them, insisting that any intentional or unintended non-compliance will be subject to sanctions, as operators have the responsibility to ensure that they are licensed for the activities they undertake.
Speaking further he said “Concurrently, as we conduct a comprehensive review of the licensing framework for payment services, we will engage in extensive consultations to develop a new regulatory and compliance framework that is suitable for the technology-driven payment services sector.
“Looking ahead for the industry, banks should reassess the responsible banking framework to ensure that the requirements are effectively integrated into their strategies. I am aware that some banks have made commendable progress in this regard.
“The Central Bank of Nigeria is taking steps to enhance its in-house capacity so that it can assist other banks that still have progress to make in implementing their sustainability principles.
The governor said the primary mandate of the CBN is to ensure price stability, in addition to other objectives such as issuing legal tender currency, safeguarding external reserves, promoting a sound financial system, and providing economic and financial advice to the government.
He mentioned that In line with CBN strategy to refocus on its core mandate, the CBN will discontinue direct quasi-fiscal interventionist activities and instead utilize orthodox monetary policy tools for implementing monetary policy.
According to him “Our monetary policies will aim to achieve price stability, foster sustainable economic growth, stabilize the exchange rate of the naira, and reduce interest rates to facilitate borrowing and investments in the real sector. In order to ensure the proper functioning of domestic and foreign currency markets, clear, transparent, and harmonized 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”
The CBN governor pointed out that the major challenges affecting the nation’s economy include high and rising inflation, inadequate foreign exchange supply, depreciation of the exchange rate, limited external reserves, weakened output, and high unemployment. These challenges according to him have led to increased interest rates, discouraging investments in productive activities.
He said within the banking system, high inflation has affected asset quality and solvency ratios.
Additionally, the persistent depreciation of the naira poses a significant risk for domestic banks with foreign exchange exposures.
He assured Nigerians that while it is indeed a formidable challenge, it is not insurmountable, adding that with the right policy measures, we can overcome these obstacles and pave the way for progress and prosperity.
He said the removal of petrol subsidy and the adoption of a floating exchange rate, among other government policies, are anticipated to have positive effects on the economy in the medium-term. These measures are expected to enhance investor confidence, attract capital inflows, stimulate domestic investment, and ultimately improve the level of external reserves. Additionally, they are expected to contribute to the stabilization of the domestic currency.
He said despite the challenging global and domestic macroeconomic environment, Nigeria’s financial sector has demonstrated resilience in 2023, with key indicators of financial soundness largely meeting regulatory benchmarks.
He mentioned that stress tests conducted on the banking industry also indicate its strength under mild-to-moderate scenarios of sustained economic and financial stress, although there is room for further strengthening and enhancing resilience to shocks.
He said although the banking sector demonstrated soundness and resilience, there is still much work to be done in fortifying the industry for future challenges.
He said in recent years, the continuous decline in Nigeria’s crude oil production has further weakened our already inadequate economic diversification. This has led to a decline in government revenue and foreign exchange inflows, while simultaneously witnessing a growth in public expenditures and a deterioration in macroeconomic indicators, which has constrained our policy options. Consequently, we have seen the fiscal deficit and public debt increase, placing additional strain on external reserves and contributing to exchange rate instability.
