The World Bank has advised the Central Bank of Nigeria (CBN) to halt its practice of intervening in the foreign exchange market through forex auctions. It recommended that the CBN adopt a transparent, systematic, and comprehensive framework to manage exchange rate interventions and reaffirm its commitment to exchange rate flexibility.
This recommendation was included in the World Bank’s Nigeria Development Update, which provides strategies to stabilise the naira. On August 26, 2024, the CBN conducted a retail Dutch auction, selling $876.26 million to end users, shifting from its usual practice of selling to Bureau De Change operators. This auction was among the largest under Governor Yemi Cardoso’s leadership, aimed at stabilising the naira and easing the volatility in the FX market.
The CBN said the auction was intended to boost liquidity, reduce demand pressure, and support price discovery. According to the sales report, 3,347 firms received access to dollars through 26 qualifying banks at a cut-off rate of N1,495 per dollar.
However, the World Bank emphasised that permitting more flexibility in FX trading over time would deepen the foreign exchange market. The report urged the CBN to maintain a unified and market-reflective exchange rate while continuing efforts to strengthen the official FX market. It also recommended restoring Bureau De Change access and allowing international oil companies to channel their FX sales into the official market.
The World Bank further suggested that building foreign reserves strategically would help stabilise the naira’s value and create a predictable economic environment for both local and international trade.
It emphasised that maintaining a single market-reflective exchange rate would enhance fiscal revenues from oil and export-related taxes, attract investment, build external reserves, and lay the foundation for sustainable growth. The report underscored the importance of anchoring exchange rate expectations to economic fundamentals rather than targeted rates.
At the IMF/World Bank annual meeting in Washington, D.C., Nigeria’s Minister of Finance, Wale Edun, acknowledged the value of the World Bank’s recommendations but noted that the government has not implemented all of them. He cited the success of the over 180 per cent subscription to a $500 million domestic bond as an example of selective policy adoption.
The World Bank also raised concerns about Nigeria’s rising non-performing loans (NPLs), which reached 5.1 per cent in Q1 2024—slightly above the 5.0 per cent prudential benchmark. The ratio increased by 0.6 per cent compared to Q1 2023, indicating that a growing portion of loans is at risk of default.
The report warned that high inflation, significant naira depreciation, and the rise in NPLs have eroded the banking sector’s capital buffers. The capital adequacy ratio dropped from 14.2 per cent in Q1 2023 to 11.1 percent in Q1 2024.
The World Bank also noted the CBN’s aggressive open market operations (OMOs), which amounted to N6.6 trillion in the first eight months of 2024—30 per cent more than the total OMOs conducted over the past three years. These operations have drained naira liquidity and attracted FX inflows, reinforcing recent foreign exchange reforms.
The report highlighted that the monetary policy stance has tightened, with the standing deposit facility rate raised closer to the monetary policy rate (MPR) and the standing lending facility rate set at MPR +500 basis points. As a result, market rates are now aligning with the MPR, further solidifying the reforms in the FX market.
