The naira, Nigeria’s currency, may appreciate in the parallel market if the Central Bank of Nigeria (CBN) can meet the demands of importers, according to Analyst Data Services and Resources (ADSR).
ADSR, a Nigerian company that specialises in data analysis and research, said in their report published on Saturday that the rate at which the naira exchanges with other currencies, especially the US dollar, in the parallel market, is now heavily dependent on the ability of the CBN to meet the demand of importers.
Their assertion comes following an October 12, 2023, policy reversal of the apex bank to include the 43 items restricted from sourcing foreign exchange at its official window back to the window.
The 43 items reinstated are rice, cement, palm kernel/palm oil products, vegetable oil, meat, and processed meat products. Others include vegetables and processed vegetable products, eggs, turkey, chicken, other poultry products, and 39 other products.
The research company explained that this reintroduction would help reduce the demand pressure importers put on the street market and transfer much of this pressure to the CBN. It said that this move could pay off as long as the apex bank continues to increase its supply of scarce foreign exchange.
It said, “Having lifted the forex restriction on the 43 items, the foregoing analysis shows that there is a likelihood that forex demand at the official market will increase by around 5 percent, leading to further depreciation of the official exchange rate.
“Conversely, an appreciation should be expected at the parallel market, but this will be to the extent that the official market is able to meet the demand of importers of these 43 items.”
It explained that appreciation depends squarely on ensuring that “demands are adequately met, especially in a transparent manner at the official market.”
Of which, “cases of mis-invoicing and smuggling of these items may fall by around 50 percent, thereby contributing to government revenue and reducing the cost of border monitoring.”
Apparently, the CBN, after the policy reversal, reached out to the World Bank to get a loan of $1.5 billion to assist it in meeting some of its statutory duties. All of this was a move to help arrest the unfortunate slump of the currency in the FX markets.
Though these are the early days of the policy reversal, the naira continues to slide in the street market as it closed trading to the greenback at N1,170 on Friday, a situation that has called for more aggressive action from the bank to increase its supply.
ADSR propositions were based on data obtained from the United Nations Commodity Trade Statistics Database (UN Comtrade), which is considered the most comprehensive trade database with over 3 billion records.
The research company focused its observations on the volume and monetary value of the 42 items imported into the country through its ports and borders with neighbouring countries.
ADSR discovered that the government’s objectives of saving foreign exchange and encouraging local production of the imported items, amongst many others, were subjective and highly debated following statements from the federal government that the volume and value of the restricted items reduced drastically during the eight years of restriction.
The company admitted that the data obtained for the imports of the 42 items smuggled into the country from neighbouring countries increased in some cases while others decreased marginally during the period of the restriction.
It said, “This may explain why a policy like the forex restriction on 43 items, which was deemed productive by the apex bank a while ago, now seems counter-productive.”
The company agreed that though the objective of restricting the importation of these items was to benefit the country, it was important to find out if the government’s objectives were achieved during the period of restrictions.
The report read, “From Nigeria’s record, its total imports of the restricted items from the rest of the world decreased by 57.1% during the period of restriction, while its imports of the same items through its neighbouring countries fell by 90.9% during this period.
“However, using the records of the neighbouring countries, a mirror analysis, Nigeria’s imports of these items through its neighbours increased by 72.6% during the period of restriction.
“It is found that Nigeria’s imports of these items through its neighbouring countries have generally been understated by 44% on average, but this understatement was observed to increase to 97% during the restriction.
“This suggests that the forex restriction might not have impacted Nigeria’s effective imports of these items, especially as they were brought in through neighbouring countries via undocumented means, including mis-invoicing and outright smuggling.”
It was, however, advised that for this policy reversal to be successful, “Nigerian policymakers need to conduct and apply evaluative research to increase the potency of policies.
“The impact of specific policies and programmes needs to be analysed against the background of the intended effects and identify the unintended but desirable effects which should be consolidated while also identifying the unintended and undesirable effects that must be ameliorated. Such studies need to be conducted both ex-ante (before) and ex-post (after).”