August 31, 2021/Proshare

by FBNQuest Research                                                                          

We see from CBN data that total sectoral utilisation of FX declined by -65% y/y and -25% q/q to c.USD5.0bn. In addition to the reduction in aggregate fx utilisation, the pandemic’s influence can be seen in changes in the composition of sectoral forex usage. Unlike the pre-pandemic trend, when invisibles (mainly services) dominated, goods imports accounted for c.58% (or USD2.9bn) of overall foreign exchange usage in Q1. As seen in our chart below, the share of invisibles which plummeted to just USD1.0bn (30% of total) in Q2 ’20 improved slightly to USD2.9bn in Q4 ’20, and then fell to USD2.1bn (42% of total) in Q1 ’21, largely due to seasonal factors. 

Drilling down on invisible imports, we see that forex utilisation by the financial services sector which accounted for c.35% (or USD1.7bn) of total fx usage in Q1, fell -84% y/y. We assume the fx usage for the sector are those related to items such as professional services including trainings, and Information technology amongst others.  

Interestingly, forex usage for education, and communication services bucked the trend as both increased by c3.5x and 2.2x for the former and the latter respectively. 

Industrial goods, the largest segment within visible imports, saw its share of forex utilisation decline to USD1.1bn from c.USD1.4bn in the comparable quarter of 2020.  

Given the difficulties with forex liquidity during the quarter, we observe that some of the non-financial names under our coverage (mostly consumer goods companies) continue to source a modest percentage (<10%) of their fx requirements through unofficial channel. 

Despite the CBN’s preference for adding food products to its forex restriction list, we observe that fx usage for foods has remained reasonably consistent at USD0.5m on a quarterly basis. Rather than restrict foreign exchange access, the CBN should, in our opinion, embrace policies that allow for greater exchange rate flexibility in the near term. 

In the long run, Nigeria can seek inspiration from further ashore. Numerous case studies of China and India suggest that either (or both) an export-driven industrialisation plan (China) or a service-led export strategy (India) are viable strategies for achieving exchange rate stability.

 Sectoral utilisation of foreign exchange (USD bn)

Sources: CBN; FBNQuest Capital Research