October 20, 2023/CSL Research
A combination of the demand arising from the lifting of the foreign exchange ban on the 43 items and increased demand for FX for school fees at the start of the new school year have increased pressure at both the official and the parallel markets causing the Naira to fall to its lowest across both market segments. Naira depreciated to N883.06/US$ at the Investors’ and Exporters’ (I&E) forex window on Wednesday, the lowest ever since the establishment of the window in 2017 and at the parallel market, the Naira depreciated to an average rate of N1,150/US$ on Thursday, the lowest ever. Nigeria has struggled with significant FX shortages, causing the naira to fall to a record low against the dollar.
The Central Bank of Nigeria (CBN) in a communiqué issued last week, raised the ban on importers of all 43 items previously barred from obtaining foreign cash through official channels. The CBN also announced plans to intensify efforts to clear the FX backlog. Based on media reports however, the payment of the FX backlog is still pending and is one reason foreign investors have retained their apathy towards investing in Nigeria. The heightened volatility of the nation’s currency has kept the Nigeria equity market under watch by the MSCI for a possible downward revision while it has been downgraded by the FTSE Russell to an unclassified market.
We have always argued that the solution to the current FX crisis is to increase the supply of FX. 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 relatively depressed. Many foreign investors have their eyes fixed on the exchange rate and are unlikely to return to the Nigerian market if there are no feasible plans to increase FX supply.
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CSL Nigeria Daily – 20 October 2023 – Forex.pdf
