There are indications that the ongoing efforts of the Central Bank of Nigeria (CBN) to improve the depth of the money market through the liberation of the foreign exchange market may be constrained by the present reliance on proceeds from crude oil sales.
A report by the Standard Chartered Bank, made available to THISDAY at the weekend said the current efforts of the CBN to lessen its role in the determination of foreign exchange rate through its various interventions might be affected by the fact that oil remains the dominant export earner.
The report, authored by the bank's Head of Regional Research, Africa, Razia Khan, noted that the CBN had significantly reduced its offerings at the Wholesale Dutch Auction System (WDAS) in recent times, saying "We note that US dollar (USD) sales at recent official wholesale Dutch auctions have totalled $50 million at each auction, compared with an average of $300 million for much of last year. But again, the development of improved market depth is little substitute for export diversification in the real economy, which depends on long-term structural reforms, especially upgrading infrastructure"
She explained that it is difficult to see full liberalisation of Nigeria's foreign exchange regime, as long as oil remains the dominant foreign exchange earner.
Speaking on last week's ratings of the Nigerian economy by the international rating agency, Standards and Poors, the Standard Chartered Bank chief said, "While the adoption of tight monetary policy and the simultaneous relaxation of minimum holding period regulations for investment in Federal Government of Nigeria (FGN) bonds have attracted sizeable inflows to Nigeria and allowed for its index inclusion, there may be more for the CBN to do.
"According to the S&P report, monetary policy is seen as "constrained by Nigeria's managed exchange rate regime and relatively less developed domestic bond markets". We expect that gradual moves to lessen the role of the CBN in the determination of the FX rate (which are already underway), will help to bolster Nigeria's FX reserves and external strength.
External buffers have been rebuilt, but Nigeria must still address its oil vulnerability," she said.
The report said increased investor interest in Nigeria, its bond index inclusion and ballooning activity in its capital markets have led to many questions about the nation's eventual eligibility for emerging-market status.
"In line with the experience of higher-rated peers, this is something that is likely to happen well ahead of Nigeria achieving an investment grade rating. While the recent re-accumulation of FX reserves courtesy of tight monetary policy, and attempts at fiscal consolidation have served Nigeria well, much more is likely to be required in order to trigger further rating upgrades. Cyclically, Nigeria has done relatively well, but structural concerns remain.
The country's low per capita GDP, unaddressed governance issues and the political risk that result, will continue to constrain its rating. With a demographic profile that presents greater challenges relative to similarly rated peers, there can be no room for slippage in the long-term reform process. Reform is an urgent necessity, not a luxury," the report said.