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