October 18, 2022/United Capital Research
At the Manufacturers Association of Nigeria Export Promotion Group’s annual conference, the Minister of Trade and Investment, Niyi Adebayo indicated a willingness to liaise with the Central Bank of Nigeria (CBN), to create a separate FX window for manufacturers in Nigeria. This is in line with the plea by the members of the association for some relief from the dollar shortage in Nigeria. According to the association, FX scarcity in the country remains a major headwind to the manufacturing sector’s growth as it limits the imports of essential materials and equipment for production.
Nigeria’s persistent FX woes are well documented and have worsened in 2022 despite the rally in crude oil prices as oil theft continue to undermine Nigeria’s FX earning capacity. In addition, policy normalization in advanced economies have made frontier markets like Nigeria unattractive for Foreign Portfolio Investment (FPI) while Foreign Direct Investments (FDI) flows remain at abysmally low levels. Lastly, rising global inflation as led to increase in the nation’s import bill while increased PMS consumption has further contributed. As a result of these issues, the ability of the CBN to ensure adequate FX liquidity has been severely hampered, pushing several manufacturers to rely on FX supply at the parallel market. Interestingly, the CBN’s decision to stop sales of FX to Bureau De Change (BDCs) implies further supply crunch at the parallel market. A resulting repercussion is the persistent depreciation of the naira caused by the supply-demand imbalance at the parallel market, causing manufacturer’s production cost to surge.
However, we struggle to see how a creation of a special window for manufacturers would solve their FX problems. The underlying concern is the CBN’s inability to earn FX and thus would imply inability to guarantee liquidity in the proposed market segment. Besides, it introduces another confusion to the existing multiple exchange rate system that continues to deter foreign investor interest in the Nigerian economy. Thus, rather than increasing the existing number of FX windows, we recommend unifying existing FX windows and introduction of conscious efforts to increase Nigeria’s ability to earn FX via improved value offerings to international markets. For example, working with key stakeholders to actualize the RT200 FX policy would provide a long-lasting solution.
