The Foreign Exchange Dilemma; to Float or Gloat?


Wednesday, December 01, 2021 / 02:39 PM / by CSL Research / Header Image Credit: Econlib


The Nigerian Foreign Exchange market has generated far reaching attention in recent years. This reality can be seen in the series of adjustments made on the Naira in recent years. Given that imported items constitute in excess of 10.0% of its Consumer Price Index, the need to properly manage its FX position is very important in actualizing the country's overall economic goals. The CBN has in the past, used various administrative measures to ensure exchange rate stability. For example, in June 2015, the Central Bank in a bid to sustain foreign exchange market stability and ensure efficient utilisation of scarce foreign exchange, excluded importers of 41 items which included rice, cement, margarine, meat etc. from accessing Forex from the official foreign exchange window. The number of these items have grown over the years.


The dip in crude-oil (a significant export commodity) price to an all-time low of US$19.33 per barrel led to a significant decline in the country's revenue. Despite the price recovery seen so far, Nigeria has yet to even-out the effect of the pandemic on its FX reserve. The Central Bank of Nigeria (CBN) has been torn between supporting economic growth and ensuring exchange rate stability. In one of the most recent moves to manage the situation, the CBN suspended intervention to Bureau De Changes (BDCs). In reality, these decisions have failed to yield the desired result. Consequently, the premium between the parallel market rate and the rate at the Investors & Exporters (I&E) window widened considerably following the announcement. In 2016, when the CBN took a similar action, it yielded limited results, as the parallel market premium was estimated at 61% as of year-end.


According to the Nigeria Development Update of the World Bank, the country's exchange rate system `has encumbered in recent times the inflow of foreign capital, a reality that is evident from the dwindled level of Foreign Direct Investment and Foreign Portfolio Investments. Over time, it has been said that the current managed float system has cost Nigeria some years of development as floating the Naira would have made the country's hard earned green back available for promoting growth. In the month of October and early November, the Naira appreciated at both the official and unofficial windows due to a sudden surge in intervention in the month of October which averaged US$205m. As the intervention waned to about N158m in November, the gains were reversed.


Moving forward, we hold that there is a need to combat the obvious vulnerabilities in the Nigerian FX Market by promoting a lasting solution. We reiterate our agelong clamour for economic managers to adequately diversify the country's export earnings particularly exploring opportunities in mining and agriculture. Furthermore, investments and business regulations to accelerate local industrialisation which would foster local production of many imported products would significantly help to reduce dependence on imported products and thus conserve scarce FX.

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