The World Bank on Tuesday advised the Central Bank of Nigeria (CBN) to provide a clearer and more predictable foreign exchange (forex) management policy for Nigeria.
The World Bank’s position on Nigeria’s forex policy indicates the global lender’s response to request for a $1.5 billion loan would be linked to how the issue was handled.
Nigeria has multiple exchange rates operating in parallel, a system put in place during a 2016 oil price crash because the government was seeking to avoid a large official devaluation of the naira as a matter of national pride.
The CBN has recently opted for a gradual weakening of the official rate of the naira in an apparent move to allow it to converge with the Nigeria Autonomous Foreign Exchange (NAFEX) rate, a market-determined rate for investors and exporters.
“We acknowledge the steps to reform exchange rates but that’s one part of it,” said Shubham Chaudhuri, the World Bank’s country director for Nigeria, said.
As part of a six-monthly report on Nigeria’s economic development, the World Bank raised exchange rate management as the first of six policy areas where it was advising the authorities to take action within three to six months.
It said Nigeria should communicate an exchange rate management strategy that makes the NAFEX, which it described as the anchor, more flexible. This would boost Nigeria’s competitiveness while helping to reduce inflation, it said.
It also urged Nigeria to enhance the forex auction process, for example by using pre-defined exchange rate bands to control possible immediate overshooting.
“We hope we can provide more financing. There has to be consensus around sustainability of the macro environment and around forex management and the need for domestic firms to invest and create jobs,” Chaudhuri said of the $1.5 billion loan.
The World Bank also said economic growth had resumed after the COVID shock but was lagging the rest of sub-Saharan Africa, with food inflation, heightened insecurity and stalled reforms increasing poverty.