Removal of the restriction of foreign exchange on 43 items by the Central Bank of Nigeria (CBN) is one that could improve market confidence, but pose a timing challenge, analysts have said.
“In our opinion, the policy is well-intentioned as it aims to circumspectly improve market confidence, which has been derailed by illiquidity and legacy unorthodox policies.
“However, timing is a challenge given the current global context of capital flows which is unfavourable for emerging economies,” said analysts at Afrinvest.
In 2015, the apex bank under the leadership of Godwin Emefiele had blacklisted 43 items from accessing forex at the official window as part of forex management and import substitution strategies.
They specifically said, moderating inflation in developed markets supports improved real rate of return, in contrast to emerging markets where forex volatility, high inflation, and political uncertainty compounds investment risk.
“In light of this, the CBN will need to roll out more complementary policies to attract the level of forex necessary to meet the policy objectives. In addition to the recent move to obtain a $3.0 billion loan from Afreximbank to support the declining foreign reserves, we recommend exhausting concessionary loan opportunities from bilateral/multilateral institutions to build a forex reserves wall chest.
“Likewise, we strongly advise exploring more oil-for- loan agreements to unlock liquidity. Furthermore, the current administration will need to strengthen ongoing efforts to curb oil thefts and enhance oil production to the target of 1.69mbpd,” they opined.
They cited the data released by the Nigerian Upstream Petroleum Regulatory Commission (NUPRC) which said the nation’s oil output rose by 14.0 per cent on a month-on-month )m/m) basis to an average of 1.35mbpd (excluding condensates of 225,753bpd) in September 2023 – marking the highest level since January 2022.
“We
attribute the improvement in crude oil output to the strong political will of the current administration to curb oil theft amid pursuit to strengthen fiscal capacity. We believe that if this momentum is sustained in the remaining part of 2023, crude oil output can be ramped up to an average of 1.50mbpd amid resilient global oil price, thereby supporting external reserves”, Afrinvest said.
They insist that the success of the CBN’s decision to reverse the ban on 43 items depends on its ability to provide enough liquidity for the demand it will bring to the official window.
“In the case of adequate liquidity, we expect to see the parallel rate premium decline gradually in the short-to-medium term. However, in the opposite case, we foresee more pressure at both the official and parallel market windows. As we have always advised, a long-term approach to solving Nigeria’s forex quagmire is to contain oil theft, boost non-oil exports, and incentivise new cross-border investment in tech and other service-based sectors”, she said.
Wednesday last week, the CBN issued a communique restating its commitment to enhancing foreign exchange liquidity, addressing the recent forex challenges, and shared its 6-point plan, one of which involves lifting the forex ban placed on 43 items. Additionally, the CBN has promised to make regular interventions in the market when needed and restated its pledge to clear the current forex backlog.
