Many Nigerians would agree that 2023 was an interesting year for the Central Bank of Nigeria (CBN). It was marked by a series of challenges and controversies that affected even the most mundane activities for Nigerians. The apex bank found itself under intense scrutiny, with people questioning everything from its leadership to the ink used to print currency notes. However, these controversies were just the tip of the iceberg, as the most significant impact was felt from the CBN’s policies.
Like every country, the central bank plays a cardinal role in strengthening a country’s economy. It controls how much money is available and how much it costs to borrow. It does this using various monetary policy tools that influence the level of economic activity. Which translates to how well the country performs. This year, like previous years, the CBN revisited past policies and introduced new ones in an attempt to stabilize Africa’s largest economy. Here’s an exhaustive list of these policies and their impact on the Nigerian economy and its citizens in 2023.
A new currency for a new dispensation
Last year, the CBN announced it would be redesigning some naira notes – N200, N500, and N1000 – because the apex bank had concerns about managing the series of banknotes in circulation, especially those outside the banking system. Yet the impact of the newly designed notes was not felt until this year. By January 31, 2023, the old naira denominations ceased to be legal tender, and the newly designed notes went into the market. But it had a sloppy start.
The CBN had told Nigerians to swap their old notes for new ones. However, the apex bank had not printed enough new notes. By February 1, there was a scarcity of banknotes in circulation. The CBN said N2.7 trillion worth of new banknotes are in circulation but not in the banking sector. This meant the monetary policy could not properly take effect. This disrupted several economic activities and caused inflation. Inadvertently causing an uproar in the nation days before and after the presidential election. In no time previous concerns about consumer spending potential logistical issues and the impact on the informal sector began to actualize. According to local reports, residents, including traders and commercial drivers rejected old banknotes despite deadline extensions. The situation became so bad, that some parts of the country began transacting with CFA Franc. The Nigerian economy lost over N20 trillion, due to the cash scarcity crisis. Even the value of electronic payment transactions declined by 5%. This policy, regardless of its intended purpose, had a tangible impact on the lives of everyday Nigerians, forcing them to navigate a new financial landscape.
An all-time high-interest rate of 18.75%
Headline inflation rates in the country were on a consistent upward trend with no signs of abating. To curb inflation, the CBN embarked on a series of aggressive interest rate hikes. The Central Bank of Nigeria unanimously decided to lift its monetary policy rate by 50 bps to 18% at its March 2023 meeting, following a 100 bps hike in January. The bank cited price and exchange rate pressures and expectations of removing a petrol subsidy. Then in June, Nigeria experienced a significant surge in inflation, reaching a new seven-year high of 22.79%. The CBN’s Monetary Policy Committee increased the benchmark rate by 25 basis points, reaching an all-time high of 18.75%.
The Central Bank of Nigeria believed that increasing interest rates would moderate the inflation rate. However, Nigeria’s inflation continued to defy gravity, similar to what happened last year after the CBN raised interest rates eight times. Besides, the impacts of higher interest rates are not distributed evenly. Increased rates create a demand for the naira, causing it to appreciate and enable foreign investors to earn more interest on their deposits in the naira. Lenders and financial institutions benefit from higher interest rates, while the policy directly affects the financial decisions of countless Nigerians, impacting their ability to borrow, invest, and plan for the future. The inflation rate experienced a marginal increase to 27.33% in October, rising by 0.61% compared to September’s 26.72%.
The loan-to-deposit ratio policy
In July, the CBN announced the resumption of strict enforcement of the Loan-to-Deposit Ratio (LDR) policy, a policy initially introduced on January 7, 2020. It required banks to maintain a minimum LDR of 65%. This implies that for every N100 received as deposits, the banks are to lend N65 to customers. The LDR is a crucial metric measuring a bank’s liquidity abilities, especially in adverse market conditions. The LDR policy strategically regulates the proportion of a bank’s deposits allocated to productive lending rather than being held in low-yield assets. The CBN set the policy to improve lending to customers.
The effect of this policy was almost immediate. It compelled deposit money banks in the country to approve N2.63 trillion worth of consumer loans for customers. In the economic report for the second quarter of 2023 by Apex Bank, consumer credit, which includes personal and retail loans, witnessed a substantial 12.2% increase, rising from N2.35 trillion in Q1 2023 to N2.64 trillion in Q2 2023—an increase of N290 billion from April to June. Consequently, total consumer credit experienced a substantial 12.2% increase, reaching ₦2,637.31 billion in Q2 2023, compared to ₦2,349.88 billion in the preceding quarter.
Naira float in the FX
On June 14, 2023, the CBN released a press release announcing its decision to allow the naira to trade freely in the foreign exchange market, with hopes that it’d bring the naira to a unified exchange rate. The policy change meant the CBN would no longer determine the exchange rate, and the rate at which the naira gets exchanged for any foreign currency is dependent on the agreed price reached by the buyer and the seller. Before the announcement, Nigeria had been struggling with an acute dollar scarcity due to low oil revenues and imports. Also, foreign investments, one of Nigeria’s chief forex sources, declined to a six-year low in 2022. The decision to float the naira was an attempt to unify the exchange rate and lure back these investors.
However, it did not achieve its goal of a unified exchange rate. There was a 25 percent margin between the official and parallel dollar exchange rates. The official market rate quickly rose from ₦462/$ to ₦700/$ and as high as ₦930 on the parallel market. The decision to float the Naira constrained businesses, including Nigeria’s top companies. Dangote Cement Plc, Nigeria’s largest firm, posted a 14% decline in pre-tax profits to ₦93 billion in its second-quarter earnings report. The company reported an exchange rate loss of ₦103.8 billion because of Nigeria’s new forex regime. Africa’s and Nigeria’s richest man, Aliko Dangote saw his wealth fall by $3.12 billion to $17.8 billion in one day. The Nigerian arm of Guinness suffered the same fate. So did Nigeria Breweries Plc, Airtel Africa, and Nestle Nigeria.
Still, the CBN was not done with the FX. In October, the CBN raised the dollar supply in the foreign exchange market, aiming to enhance liquidity. This change also marked the end of an eight-year ban on 43 items previously restricted from accessing forex through official channels. The CBN aimed to create a more adaptable economic environment by boosting liquidity and revising these restrictions. At the close of trading in the Investors and Exporters (I&E) window, the local currency traded at N764.51/ $1.0 down from N759.20/ $1.0 the previous day. In the parallel market, the local currency depreciated to N1045/ $1.00 from N1043/ $1.00.
CBN approves Naira payout for diaspora remittance
This year, the CBN also approved the payment of the Naira to beneficiaries of diaspora remittance, allowing Nigerians who get money from overseas to receive it in Naira. This ended a three-year ban that the CBN had imposed on banks and International Money Transfer Operators (IMTOs) from paying Naira to remittance beneficiaries. The policy was a move to relax the tight control that the CBN had maintained over FX rates for the past five years. It also gave customers the option to choose the currency they prefer, whether it is foreign currency, the naira, or the Naira. Customers who opt for the Naira will get the Investors & Exporters Window rate of the day they receive the money. This month, the World Bank stated that Nigeria is expected to receive more than $20bn in official remittances by the end of 2023, a slight increase compared with the previous year.
CBN removes deposits and withdrawal limits on domiciliary accounts
As of June 19, 2023, domiciliary account holders were permitted to utilize cash deposits and make withdrawals not exceeding $ 10,000 per day or its equivalent via telegraphic transfer. This policy was part of the CBN’s efforts to unify the foreign exchange market and improve liquidity and transparency.
The policy had various impacts on Nigerians, depending on their income level, consumption pattern, and access to foreign exchange. Nigerians who receive money from abroad have more flexibility and choice in managing their funds held in domiciliary accounts. The policy also increased the supply of foreign exchange in the official market, reducing the pressure on the naira and narrowing the gap between the official and parallel market rates. This benefited Nigerians who needed foreign exchange for visible and invisible transactions, such as medicals, school fees, BTA/PTA, airline, and other remittances. The total balance in the domiciliary accounts in Nigeria’s commercial and merchant banks rose $29bn, more than a fifth of what it was.
CBN welcomes back BDC
In August, the CBN welcomed back the Bureau De Change into the regulated FX market with a series of operational changes meant to improve the efficiency and transparency of the Nigerian Foreign Exchange Market. The CBN had stopped giving foreign exchange to Bureau De Change firms a month earlier. This policy led to the loss of 40,000 operators’ and traders’ jobs in the parallel market. According to the new framework, the CBN placed the buying and selling rates of the BDC operators within a range of -2.5% to +2.5% of the Nigerian Foreign Exchange market window’s average rate. As a result of the policy, the naira crashed the price to N845 per dollar after trading at N955 earlier that same week.
Suspension of processing fees on large deposits
The CBN ordered all banks and other financial institutions to stop charging processing fees on large deposits. This change applies to deposits above ₦500,000 for personal accounts and ₦3,000,000 for business accounts. The policy on other fees stays the same. This action had a beneficial effect, particularly on small and big businesses. Previously, deposits over these limits faced processing fees of 2% for personal accounts and 3% for business accounts. Because of the change, the public was motivated to save their money with financial institutions, which helped to follow its cashless policy.
CBN lifts crypto ban
To end the year, the CBN reversed its position on crypto assets in the country and told banks to ignore its previous prohibition on crypto transactions. In February 2021, the CBN sent a circular that banned banks and other financial institutions from handling accounts for cryptocurrency service providers because of the dangers and weaknesses of money laundering and terrorism financing, and the lack of rules and safeguards for consumers.
The Nigerian crypto community, which was rapidly growing and had the convenience of using bank accounts for crypto/fiat transactions, faced a major challenge when the ban was imposed. To keep their businesses running and customers satisfied, crypto companies had to operate discreetly and innovatively. Despite developments that occurred in the past year, such as the introduction of the National Blockchain policy in May, the ban remained effective until December 22, 2023. Crypto company Quidax celebrated the ban lift by providing free deposits and withdrawals to old and new customers for 30 days.