The Central Bank of Nigeria (CBN) recently announced the lifting of restriction placed on the purchase of foreign exchange for the importation of 43 items that was in place since 2015. The decision generated debate among Nigerians with some tagging it a policy somersault and one that will ‘erode gains’ made by Nigeria following the 2015 restrictions.
I beg to disagree with that school of thought. We need to go down memory lane and understand what led to the restriction in the first place. The trigger for that decision was the rate at which the foreign reserve was declining in 2015. Remember that PMB inherited a foreign reserve of $28 billion and ECA balance of around $2.2 billion from GEJ in 2015. Around 2008 we had $53 billion in our foreign reserves and around $22 billion in the ECA as at 2007.
This meant that our exchange rate was stable even in the face of unmitigated imports and the 2008 economic crisis. Oil prices started falling from above $100 dollars per barrel in 2013/2014 to less than $30 per barrel as at May 29, 2015. The crude oil price collapse meant that Nigeria’s forex earnings shrank too.
It was therefore clear to the CBN that they could no longer afford to be meeting the forex demands of all importers in addition to TBA needs of Nigerians as well as capital exportation of multinationals. This forced the CBN to issue the 2015 circular restricting forex sale from the official foreign exchange market to importers of 43 items.
People erroneously called it ban but it was not a blanket ban. CBN has no power to ban importation of any item. That is the duty of Customs and the Nigerian Customs Service never placed most of these 43 items on its ban list.
What simply happened was that if you must import these items (especially those not on custom ban list), you would have to source for your forex at the parallel market. It led to increased demand for forex at the parallel market and consequently an increase in the exchange rate of Naira to the dollar at the parallel market.
This created an avenue for arbitrage since the official rate was static more or less. Also price of imported consumer goods steadily rose. That was one of the unavoidable disadvantages of the policy. Mind you, even the officially banned items on the customs list were still being imported such as guns and ammunition for criminals, poultry products etc and the importers of these items equally source their forex from the parallel market and then smuggle in their goods.
What likely pushed the CBN to lift the restriction now is not really because we now have a huge amount of dollars in our foreign reserve that can serve all importers, it is simply because of the dysfunctionality it creates in the exchange rates as seen in the huge gap between the rate at the official and parallel markets despite the recent unification of the different official forex windows, which the CBN hitherto maintained.
The gap narrowed significantly initially when CBN announced the unification of their windows but in the past couple of weeks, that gap has been widening once more, up to more than N200 difference at times. This is a big problem because it will make sure that one of the greater sources of forex earnings for the country, which is diaspora remittances will continue to be channeled to the parallel markets because it gives the recipients higher Naira value.
Now, the thinking of the CBN (which is an experiment by the way in my view since Nigeria is a unique country that rarely obeys normal economic principles), is that by lifting the restriction placed on purchase of forex for these items, it will channel demand away from the parallel market back to the official market since the importers of these items can once again legally access forex in the official market.
Less demand in the parallel market means the rate will start to come down and we may then likely experience a convergence of the two market rates at some point. Already, 24 hours after the announcement of the reversal, volume of transactions on the official foreign exchange market increased by 1,302% signaling positive reception of the policy. This is how Naira achieves its stability.
However there is a little headache for CBN, which I am sure the apex bank has figured a way to tackle. For this to work, CBN needs to provide enough forex liquidity in the official market to accommodate the anticipated increased demand from importers. Where would they get the adequate forex you may ask? Well, they have their eyes set on many options TWO of which include:
1. Diaspora remittances: The CBN wants to encourage more Nigerians in the diaspora and recipients of the remittances with certain incentives so that as they send money back home they go through the official market and remain in the official market. This improves the liquidity in the official forex market and starves the parallel market of dollars and other foreign currencies.
For context, in 2022 Nigeria’s diaspora remittances stood at $21.9 billion but a substantial percentage of that amount found its way to the parallel market due to the higher rates there. If more of these remittances stay in the official market, the disparity between the two market rates will likely disappear.
2. Dangote Refinery. Yes! You may ask how? Dangote Refinery coming on board will change the forex market dynamics for good. It means NNPC Ltd, which has ended its crude swap deal for importing PMS and will be paying cash instead, as well as other major oil marketers who import at least diesel, kerosene and PMS to an extent won’t be needing forex again to waste on importation of petroleum products.
They will be buying in Naira! This means CBN gets to keep more of the forex earnings we get from oil and other exports, which allows it to provide more liquidity in the foreign exchange market. Also Dangote Refinery will be exporting PMS too and earning extra forex for Nigeria.
To understand how big the impact of Dangote Refinery will be for our forex regime, it is important to note that in 2022, Nigeria’s total import bill (including petroleum products imports) stood at $53.1 billion while export earnings stood at $46.93 billion, 78% of which came from crude oil. Out of the $53.1 billion spent on importation in 2022, a total of $23.3 billion was spent to import petroleum products.
This means if you remove petroleum products imports, Nigeria only spent $29.8 billion on importation of goods in 2022 (minus smuggled goods). Imagine having an extra $23.3 billion that could have been used to import fuel as well as more of the diaspora remittances available to the CBN, why would the Naira not be stable! That is what is giving the CBN extra confidence to go on with this policy.
The totality of this CBN forex policy will have one major impact – reducing cost of imported goods as the exchange rate crashes. Local manufacturers will also benefit because cost of importing some of their raw materials and equipment/spare parts will reduce as the Naira appreciates against the dollar.
It means businesses will stop giving excuses of ‘dollar price is rising’ as they increase their prices. CBN clearly is targeting inflation control and it’s a good thing once combined with efforts to spur local productivity driven by agriculture, solid minerals and manufacturing. Hopefully in the next 12 months there would be significant impact that everyone can feel so that the poor can at last breathe!