Exchange rate volatility can “rubbish” banks’ new capital base, says Ayo Teriba

 

“The CBN has achieved a unified exchange rate – this has eluded Nigeria for 11 years. All this is commendable. The only thing that the CBN has not achieved is exchange rate stability – the rate continues to be volatile.”

The Chief Executive Officer of Economic Associates (EA), Ayo Teriba, says the volatility of the foreign exchange rate can rubbish the gains of the planned banking sector recapitalisation programme of the Central Bank of Nigeria.

Teriba, who spoke on Thursday at the Vanguard Economic Discourse held at the Civic Centre, Victoria Island, Lagos, advised the CBN to increase its forex reserves just as it is mandating banks to increase their capital base. He said that just as the apex bank argues that Nigeria requires banks with a larger capital base to build a “trillion dollar economy”, an ambition of the President Bola Ahmed Tinubu administration, the target GDP size also requires much bigger foreign currency reserves.

The apex bank had in March 2024 raised the capital base of commercial banks with international authorisation to N500 billion and those with national authorisation to N200 billion.

By the recapitalisation, the CBN said it was enhancing the banks’ resilience, solvency, and capacity to support the growth of the Nigerian economy.

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Commending some of the recent reforms of the apex bank, Teriba noted that “the CBN has done many things right. It removed opacity in the foreign exchange market and brought transparency. The forex market is no longer exclusive – the CBN has allowed all legitimate participants to come in – evident in the licensing of 14 new international money transfer organisations (IMTOs).

“The CBN has achieved a unified exchange rate – this has eluded Nigeria for 11 years. All this is commendable. The only thing that the CBN has not achieved is exchange rate stability – the rate continues to be volatile.”

Stabilising forex rate

According to Teriba, the stability of the exchange rate depends on growing foreign exchange reserves.

“Exchange rate stability lies behind a wall of growing foreign currency reserves. I am surprised that Nigerians are not challenging the CBN to increase foreign currency reserves to $60 or $80 billion. This is what can bring about foreign exchange rate stability,” the economist said.

“As the CBN is asking banks to raise their capital base, the CBN should also remove the log in its own eyes by increasing its foreign exchange reserves. If we don’t boost our reserves, we are likely to continue to suffer from foreign exchange volatility and inflation. This will rubbish the new capital base of the banks,” he added.

 

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Furthermore, commenting on the recent increase in interest rates by the CBN, Teriba further stated that the measure would not in itself bring about forex rate stability but rather impose a constraint on economic production.

“Increasing interest rates will not bring about foreign exchange rate stability. It imposes a constraint on economic production. So, it has significant economic costs,” Teriba submitted.

He also commented that Nigeria is “suffering needlessly” by trying to rely on taxing a diminishing GDP to grow. The economist said it’s also futile to borrow against oil income. He explained that the better approach is for Nigeria to release the value from its vast assets, such as wasting public real estate.

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