The recent decision by the Central Bank of Nigeria (CBN) to lift the foreign exchange restriction on 43 items is seen as a move that could potentially boost market confidence.
However, analysts argue that the timing of this decision is challenging, given the current global economic context, where capital flows are unfavorable for emerging economies.
According to analysts at Afrinvest, the policy has good intentions as it aims to cautiously restore market confidence, which has been undermined by liquidity issues and previous unconventional policies. Nevertheless, the analysts highlight the unfavorable timing, as developed markets are experiencing moderating inflation, which supports improved real rates of return, while emerging markets face forex volatility, high inflation, and political uncertainty, which compound investment risks.
Afrinvest recommends that the CBN should implement complementary policies to attract the necessary forex to achieve its objectives. They suggest seeking concessionary loans from bilateral and multilateral institutions to bolster foreign reserves. They also advise exploring oil-for-loan agreements to unlock liquidity, along with stronger efforts to combat oil theft and enhance oil production.
The analysts cite data from the Nigerian Upstream Petroleum Regulatory Commission, which reveals a 14.0% month-on-month increase in the nation’s oil output to an average of 1.35 million barrels per day (excluding condensates) in September 2023. This marks the highest level since January 2022, and they attribute the improvement to the government’s commitment to curbing oil theft and bolstering fiscal capacity.
Afrinvest emphasizes that the success of the CBN’s decision to reverse the forex ban on 43 items hinges on its ability to provide sufficient liquidity to meet the demand at the official window. They predict that, with adequate liquidity, the parallel market premium will gradually decline, but insufficient liquidity could lead to increased pressure in both the official and parallel markets.
The analysts advocate a long-term approach to addressing Nigeria’s forex challenges, including containing oil theft, boosting non-oil exports, and encouraging cross-border investment in technology and service-based sectors.
The CBN recently reaffirmed its commitment to enhancing foreign exchange liquidity and shared a 6-point plan to address forex challenges, including the lifting of the forex ban on 43 items. They also pledged to make regular market interventions and clear the current forex backlog.
In 2015, the CBN, under the leadership of Godwin Emefiele, had imposed a forex ban on 43 items in an attempt to manage forex and promote import substitution. However, this policy failed to achieve its objectives due to misalignment with market forces and a lack of coordination between fiscal and monetary authorities, resulting in declining forex reserves and a weakening Naira. The decision to lift the forex ban is seen as a positive step to reduce pressure on the parallel market and curb speculative activities, potentially narrowing the gap between official and parallel market rates.
