The Central Bank of Nigeria (CBN) has said it is planning to implement a new round of banking recapitalisation for the Deposit Money Banks (DMBs).

CBN Governor, Olayemi Cardoso, announced this at the 58th Annual Bankers’ Dinner organised by the Chartered Institute of Bankers of Nigeria (CIBN) on Friday night in Lagos.

DIPLOMATIC DIARY reports that the planned recapitalisation means that DMBs will be required to raise additional capital to meet the demands of Nigeria’s economy.

Cardoso noted that President Bola Ahmed Tinubu in his Policy Advisory Council report on the national economy, had set an ambitious goal of achieving a Gross Domestic Product (GDP) of one trillion dollars by 2030, with clearly defined priority areas and strategies.

According to him, it is important that banks have a role to play in the anticipated one trillion dollars economy by 2030.

Cardoso said going by the huge developmental role the apex bank would want the banks to play in the next seven years, it had become imperative to demand their recapitalisation.

To achieve the target, Cardoso said that Nigeria needed to experience a more rapid and inclusive economic expansion.

“The administration has already commenced this journey through fiscal reforms, including the removal of petrol subsidies and the unification of the foreign exchange market rate.

“Considering the policy imperatives and the projected economic growth, it is crucial for us to evaluate the adequacy of our banking industry to serve the envisioned larger economy.

“It is not just about the stability of the financial system in the present moment, as we have already established that the current assessment shows stability.

“However, we need to ask ourselves: Will Nigerian banks have sufficient capital relative to the financial system’s needs in servicing a $1.0 trillion economy in the near future? In my opinion, the answer is “No!” unless we take action.

“Therefore, we must make difficult decisions regarding capital adequacy. As a first step, we will be directing banks to increase their capital”, he said.

The CBN governor also announced the approval of another round of Open Market Operations (OMOs) to mop up excess liquidity from the banking system.

OMOs are the main monetary policy instrument, through which the central bank buys or sells securities with financial institutions in the open markets, thereby influencing the amount of money in circulation and/or interest rates.

Cardoso said, “An OMO auction was recently held with a stop rate of 17.5 per cent for the one-year tenor, attracting oversubscription of N350 billion.

“Another round of OMO has been approved to further reduce excess liquidity.

“Offering N108.1 billion worth of Treasury Bills with three tenors to the investing public, which can help reduce liquidity in the banking system and support government fundraising.’’

Cardoso said the apex bank would use its monetary policy tools to keep inflation low and stable.

“The Central Bank of Nigeria is committed to achieving monetary and price stability. This is not just a technical objective, but it has real-life implications for the well-being of our citizens.

“Through targeted policies, transparent market operations, and coordination between monetary and fiscal authorities, we can ensure a more stable exchange rate, control inflation, and create an enabling environment for businesses and individuals to thrive”, he said.

He also noted that the apex bank had taken steps to improve the effectiveness of its monetary policy tools and to strengthen the transmission mechanism so that its policy decisions have a greater impact on the economy

Cardoso added that the ability of the monetary policy committee to influence the economy through its decisions had been weakened because the channels through which monetary policy was transmitted had become disrupted.

The CBN governor said the apex bank was planning to make changes to the country’s foreign exchange regulations by developing new guidelines and legislation.

He stated that banks and foreign exchange operators would be consulted before making any final decisions.

Meanwhile, the apex bank has clarified that the 43 items were never explicitly prohibited from importation or sale in Nigeria.

Cardoso however, explained that the apex bank had implemented restrictions on accessing foreign exchange for the importation of these items.

He emphasised that the issue of trade policy, specifically the importation and sale of the 43 items, was primarily within the domain of the fiscal authorities, not the CBN.

This distinction, he said, was important because it clarifies that the CBN’s decision to lift the foreign exchange restrictions on these items was not intended to encroach upon the responsibilities of other government agencies.

The list which was originally 41 was updated to include two more items.

The CBN had in a circular in June 2015, published a list of imported goods and services that will not be eligible for foreign exchange in the Nigerian foreign currency market.

But the CBN precisely on Oct. 12 2023, announced that it had lifted the ban on the issuance of foreign exchange for the importation of rice, vegetable oil, and poultry products among other 43 items.

Cardoso said, “Allow me to provide further clarification on the issue of the 43 items.

“Firstly, it is important to note that these items were never outrightly banned by the government. The CBN had imposed restrictions on their access to foreign exchange in the official market.

“However, these restrictions resulted in increased demand for foreign exchange in the parallel market, leading to the depreciation of the exchange rate in that segment of the Nigerian Foreign Exchange Market and widening the premium between the parallel and official market.’’

Cardoso said studies had shown that during the period when the 43 items were restricted, there was a 51.0 per cent increase in trade evasion by importers accessing the foreign exchange market.

According to him, this resulted in a revenue drop of approximately $1.4 billion, or $275 million annually, between 2015 and 2019.

Cardoso added that revenue from tariffs on goods decreased from a high of approximately $920 million in 2011 to about $250 million in 2017.

“In 2019, the actual tariff on goods stood at $320 million, but counterfactual evidence suggests that as much as $680 million could have been earned in the same year,” he said.

He added that evidence had shown that foreign exchange restrictions had an adverse impact on Nigerian households and contributed to inflationary pressures.

Cardoso said the reduction in trade restrictions and levies on rice, sugar, and wheat by 50.0 per cent had only a minimal impact on welfare, with a 0.8 per cent improvement, and a mere 0.4 per cent reduction in extreme poverty.

Cardoso explained that the benefits of trade gains for the general population were negligible, as the average industry in Nigeria pays 13.7 per cent more for its inputs.

According to the CBN, this action will boost liquidity in the Nigerian foreign exchange market and intervene from time to time, adding that interventions will decrease as liquidity improves.

Meanwhile, a former CBN Director, Prof. Akpan Ekpo, has said the apex bank made a big error by opening up the foreign exchange market.

“It is an error because the dollar, pound and euro is not our money, we only get dollars when we sell oil mainly.

“Our economy is not productive and we don’t have firms that manufacture non-oil goods services, export them and earn forex.
“So, our naira is not convertible, in that case every country like ours will have what they called managed float.

“So when you come and put in more dollars because you have gotten more forex, these are very short term measures, they are not sustainable, so the problem is a supply and access problem”, he said.