Thread by @FinPlanKaluAja1

Someone asked..."how does CBN defend the Naira" ?

Well In terms of an exchange rate management policy, the Central Bank of Nigeria CBN has ONLY 2 main policy choices.

1. Devalue the Naira ie black market rate

Or

2. Defend the Naira ie Interbank rate

Devalue means CBN's foreign reserves remain intact as importers get Forex from interbank but pay market rate

Defend means CBN gives out foreign reserves to banks to fund imports at official or subsidised rates, well below black market rate.

If export (Crude Oil) sales are strong, Naira raises because CBN has more ammunition to fund the Import Export window and meet commitments.

If exports fall, and CBN wants Naira to stay "strong", CBN taps reserves to fund Import/Export Window more and meet commitments

Thus when you see the Naira rise or stabilize (and US Dollar fall) on black market....look at CBNs dollar reserves, if its also falling, then the Naira's strenght is from spending down the fx reserves.....not necessarily growth in exports.

In effect, the CBN funding the Import/Export window with say $20m a week is "defending" the Naira with $20m a week which means CBN forex reserves fall if exports are sluggish.

Devaluaton is not a solution, its just a necessary option to choose from in reaction to a changing macroeconomic environment specifically a fall in forex earnings and inflow to Central Banks to meet commitments.

So ....devalue or defend?