August 18, 2023/CSL Research

Since the unification of all the official foreign exchange (FX) windows, the Naira has declined by 61.04% to N745.43/$ as of 17 August 2023 from N462.88/$ (price prior to the new policy) at the I&E Window. However, the real shocks of the policy were witnessed in the parallel market leading the Naira to fall to a high of N955/US$ on 15 August 2023. With little control over the depreciation of the nation’s currency, the acting governor of the Central Bank of Nigeria (CBN), Mr. Fola Shonubi, announced plans to put in place new policies that would guide the dealings of FX to boost supply in the market.

Following the announcement from CBN, there were news reports that the Nigerian National Petroleum Corporation Limited (NNPCL) has entered into a crude for cash funding agreement with the African Export-Import Bank (Afrexim) to the tune of US$3bn. Note that this is not a crude for refined products swap but rather advance payment for future crude deliveries. This is expected to provide the government with sufficient dollar liquidity to stabilize the Naira, amidst low net reserve levels. Expectations of the roll out and disbursements from the CBN and the NNPCL prompted a knee-jerk reaction in the parallel market as the Naira recovered to N850/US$ on 16 August 2023.

We have always argued that while we believe the unification of the various FX rates is a pro-market policy that will be positive for the economy in the long term, we are concerned that the shock may be too hard on the fragile economy and the average consumer in the short to medium term. A focus on rate convergence without structural reforms to increase the supply of FX will be a case of treating the symptoms while ignoring the underlying cause of the problem which is an acute shortage of supply amidst a growing demand for FX. Crude oil sales and Foreign Portfolio Investments (FPIs) are two major sources of FX that have declined significantly. Oil production remains depressed, reported at 1.29 mbpd in July and we are yet to see any significant foreign capital inflows. Many foreign investors have their eyes fixed on the commencement of the Dangote refinery which appears to be the only real hope of increasing FX supply in the near term.

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