Nigeria's Foreign Exchange Policy: Navigating Through the Tides of Uncertainty

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Monday, May 31, 2021 / 12:16 PM / By FSDH Research / Header Image Credit: FSDH Research

 

Highlights:

  • The recent action by the Central Bank to unify the exchange rate is a positive move for the economy. This was a recommendation in our Macroeconomic Review for 2021 Q1. With this move, the CBN has taken a step towards ensuring clarity and improving market confidence. Nigeria can also unlock funding from several multilateral organisations such as the IMF and World Bank and ease the pressure on the exchange rate in the medium term. However, exchange rate unification is not a sufficient factor in attracting significant capital into the country. What should follow the CBN's recent actions, in our view, are a set of consistent forex policies that seek to improve market liquidity and prevent every form of forex arbitrage and unnecessary forex subsidies. The CBN will also need to clear forex backlogs to further instil confidence in the market. In February 2021, the IMF estimated backlogs at US$2 billion. We believe this will be done gradually.
  • As much as Nigeria needs effective management of forex and unification of exchange rate to boost confidence, the supply shortage of forex is still a major problem. Increasing forex supply from non-CBN sources is vital in maintaining exchange rate stability in the I&E window and reducing speculative activities. In addition, the planned issuance of Eurobond by the government is expected to provide some relief in the market and boost external reserves in the short term.
  • From the fiscal and trade perspective, Nigeria will need to leverage on the African Continental Free Trade Area (AfCFTA) Agreement to boost non-oil exports and increase forex inflows. Providing direct incentives for businesses to produce for exports, implementing port reforms as well as developing a comprehensive industrial and trade strategies are important steps that the government must take.
  • We believe that the Naira will settle around N430/US$ in the latter part of 2021. Forex inflows are expected to also improve, especially when the Eurobond is issued, but increasing demand pressures from imports and other payments, will continue to exert pressure on the rate.


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