Volatile FX market threatens Nigeria bank recapitalisation plan, warns Teriba

Onome Amuge

Ayo Teriba, the chief executive officer of  the Economic Associates (EA), has warned that the volatility and unpredictability of the foreign exchange rate pose a significant threat to the projected gains of the Central Bank of Nigeria’s (CBN) proposed banking sector recapitalisation programme.

Teriba, in a presentation during the Vanguard Economic Discourse themed: “Reforms in the ERA of Global Economic Uncertainty:Wither Nigeria”, warned that the rapidly fluctuating forex market could undermine the efforts of the CBN to strengthen the capital base and financial stability of the banking sector, ultimately jeopardising the expected positive impacts of the initiative on Nigeria’s economy.

The prominent economist underscored the crucial need for the CBN to expand its foreign exchange reserves in tandem with its effort to increase banks’ capital base.

Citing the CBN’s argument that a trillion-dollar economy necessitates the establishment of larger banks, Teriba asserted that a corresponding increase in the nation’s foreign currency reserves would be vital in supporting this ambition of the Tinubu administration.

Teriba pointed out that Nigeria’s current foreign exchange reserves, amounting to less than $40 billion, fall short of what is required for a $1 trillion economy, suggesting that reserves of not less than $60 billion would be required to achieve the ambitious target.

In Teriba’s view, with reserves only adequate for a $350 billion economy, Nigeria’s current forex position is clearly insufficient to support the envisioned $1 trillion economy, and this must be addressed urgently alongside the planned banking sector recapitalisation in order to avoid value erosion.

The CBN set in motion a transformation in the banking sector in March 2024, raising the capital base of commercial banks to N500 billion for those with international authorisation and N200 billion for banks with national authorisation.

Driven by the overarching goal of enhancing the resilience, solvency, and capacity of these banks to power the Nigerian economy’s growth trajectory, the recapitalisation initiative set the stage for a more stable and robust financial sector, expected to support the nation’s economic development ambitions.

Acknowledging the CBN’s move towards refining the financial sector, Teriba commended the apex bank for its initiatives, including the removal of opacity from the foreign exchange market, paving the way for greater transparency and trust.

In a testament to the CBN’s more inclusive approach, Teriba further noted that the expanded access to the forex market was granted to all legitimate participants, citing the licensing of 14 new international money transfer organisations (IMTOs) as a prime example.

While highlighting the CBN’s notable achievements in recent times, the CEO of Economic Associates, credited the apex bank for the successful unification of the exchange rate, which had been elusive for 11 years. This accomplishment, Teriba maintained, is undoubtedly commendable.

However, the leading economist further noted that the one area in which the CBN has not yet made significant headway is in achieving exchange rate stability, as volatile swings in the rate persist. In Teriba’s expert opinion, achieving this critical goal hinges on the steady growth of Nigeria’s 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.

Analysing the impact of the recent interest rate hike initiated by the CBN, Teriba raised concerns over its potential limitations in stabilising the foreign exchange rate, asserting that the measure in isolation may not address the fundamental volatility in the currency market.

In addition, Teriba cautioned that the increase in interest rates, while seemingly an effective monetary tool, could also introduce unintended consequences, constraining economic production and inflicting substantial economic costs on businesses and consumers alike.

Teriba lamented that the Nigerian economy is enduring unnecessary hardship due to the reliance on taxing a shrinking GDP to fuel growth, which he characterised as an unsustainable and ultimately detrimental strategy.

He pointed out  that borrowing against the country’s diminishing oil income would only exacerbate the existing predicament, proposing instead a more resourceful approach to unlocking value from the country’s untapped assets, including public real estate that has been left to waste.