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The new flexible Foreign Exchange (FX) policy introduced by the Central Bank of Nigeria (CBN) is failing to close the gap between the interbank and parallel market rate as the continued exclusion of 41 items from the Inter Bank FX market (IFEM) distorts efficient price discovery.
Nigeria’s naira was quoted at an all-time low of N418 to the dollar on the black market yesterday, compared with N305.5 per dollar on the FMDQ spot FX market, equivalent to a 37 percent spread between the informal and formal currency rate.
That is the widest gap on record since at least 1999; data compiled by BusinessDay show, and the biggest culprit is the 41 items ban, analysts say.
“The FX conundrum Nigeria now faces is that the parallel market rate is overshooting and will keep doing so as long as you keep the 41 items banned,” said Charles Chukwuma Soludo, a former CBN Governor (2004 – 2009) at the Delta State Investment Summit, held in Asaba, over the weekend.
Current CBN Governor, Godwin Emefiele imposed the ban on importers of goods ranging from glass to toothpicks from accessing foreign exchange from banks, in June 2015, saying that Nigeria should be able to produce them locally.
The full list includes: rice, cement, margarine, palm kernel and vegetable oil products, meat and processed meat, vegetables and processed vegetables, poultry – chicken, eggs, turkey, private airplanes and jets, Indian incense, tinned fish in sauce, cold rolled and galvanised steel sheets, roofing sheets, wheelbarrows, head pans, metal boxes and containers, enamelware, steel drums and pipes.
Others are wire rods, iron rods and reinforcing bars, wire mesh, steel nails, security and razor wire, wood particle and fibre boards and panels, plywood boards and panels, wooden doors, furniture, toothpicks, glass and glassware, kitchen utensils, tableware, ceramic tiles, textiles, woven fabric, clothes, plastic and rubber products, soaps and cosmetics, tomatoes/tomato pastes and Euro bond/Foreign Currency Bond and Share Purchases.
Soludo argues that most of the items on the list should be the concern of the fiscal authorities and not a monetary issue.
The restrictions have hurt manufacturers who depend on imported goods for raw materials to run their factories, with the sector going into recession last year and contracting by 7 percent in the first quarter of 2016.
The naira should be trading at near N315 per dollar on the purchasing power parity (PPP) model, according to Bismarck Rewane of Financial Derivatives, an economics consulting firm.
“There is divergence between market realities of (N400+ per dollar) and economic expectations (N315), with the IFEM rate converging towards the parallel market rate,” Rewane said.
The FX distortions are stoking inflation and having a negative effect on the wider Nigerian economy, which is forecast to contract by 2 percent in the second quarter of 2016.
Headline inflation touched a high of 16.8 percent for June, while the country’s misery index (Inflation plus Unemployment), reached 47.7 percent, “threatening political stability and social cohesion,” according to Rewane.
The inclusion of rice on the list of 41 items excluded from accessing forex from the official window, as well as the general issues with sourcing FX has led to a drop in rice supply to the domestic market and a spike in prices, according to FBN Quest.
“Considering that the FGN’s set minimum wage currently stands at N18,000 per month, a bag of rice currently priced at N23,000 per bag is almost not affordable for the average household,” FBN Quest analysts led by Gregory Kronsten, said in an Aug. 30 note to investors.
“Despite the ban on rice imports through land borders, there has been increased smuggling.”
The 41 items also include essential raw materials that manufacturers can only buy from abroad, and has led to factory closures and thousands of jobs lost.
Nigeria’s recession is largely self inflicted and was largely avoidable, according to Soludo.
“Government needs to unveil an agenda for supply side economic growth. The general consensus is enough of the excuses,” Soludo said.
PATRICK ATUANYA
