Nigeria’s economy recorded 17.5 per cent foreign exchange (FX) inflows in the first quarter (1Q) of 2023, but this did not reflect in external reserves accretion and naira stability as seen in the latest published report by the Central Bank of Nigeria (CBN).
The report showed that FX inflows into the Nigerian economy rose 17.5 per cent to $17.18 billion in Q1 of 2023 from $14.62 billion in the fourth quarter (Q4) of 2022.
During the same period, FX reserves declined by 4.01 per cent ($1.47bn) to $35.14 billion in Q1, 2023, from $36.61 billion at the end of December 2022.
Naira lost 3.41 per cent of its value against the dollar during the period under review. One dollar was quoted at N460.93 in Q1 against N445.71 mentioned in Q4 2022.
“If Fx inflows went up by 17.5 per cent, but reserves declined together with a devaluation, it shows Fx demand also increased higher than the increase in the supply of 17.5 per cent,” said Yemi Kale, partner & chief economist, KPMG Nigeria.
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According to him, 17.5 per cent is not the net flows, which matters: Inflows -outflows. “For it to reflect stability, net inflows have to be positive and high, which means inflows must be higher than outflows,” he said.
The CBN report noted that net foreign exchange inflow through the economy
increased by 24.7 per cent to $7.20 billion from $5.78 billion in the preceding quarter. Similarly, net inflow through autonomous sources rose to $8.89 billion from $7.08 billion in the prior quarter. However, a net outflow of $1.69 billion was recorded through the Central Bank, compared to a net flow of US$ 1.30 billion in the prior quarter.
The average exchange rate of the naira per US dollar at the Investors’ and Exporters’ (I&E) window was N460.93/US$ in Q1, compared with N445.71$ in 2022Q4, representing a 3.41 per cent loss for naira.
Due to pent-up demand amid dollar shortages, some banks have stopped attending to FX requests by customers even after exchange rate windows unification on June 14, 2023, by the CBN.
“It is rather a complicated situation to be in. Increasing FX supply requires a combination of medium-term and long-term wins,” said Abiodun Keripe, managing director of Afrinvest Research & Consulting,
He said the medium-term win would be asking for some balance of payment facility from the Multilaterals such as the World Bank. At the same time, the long-term successes require increasing exports, driving foreign direct investment, and attracting foreign portfolio investments and remittances.
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Marvelous Adiele, Senior Associate, Parthian Partners, said the limited supply of USD has been a significant factor hampering banks’ ability to meet customers’ demands.
“Consequently, we have seen most demand going to the parallel market, leading to a widening gap between the similar and official market rates.
The most obvious response would be to sort out the USD supply issues,” she said.
Nigeria’s currency has depreciated against the US dollar by 59.79 per cent at the official market in President Bola Ahmed Tinubu’s last three months.
One dollar was quoted at N463.33 as of May 25, 2023, before Tinubu assumed office on May 29, 2023. This is stronger than N740.38/$1 quoted on Friday, September 1, 2023, at the Investors’ and Exporters’ (I&E) forex window, Nigeria’s official FX market.
At the parallel market, the naira depreciated by 20.07 per cent as the dollar is currently trading at N917 compared to N762, as of May 25, 2023, before Tinubu assumed office.
Muda Yusuf, chief executive officer of the Centre for the Promotion of Private Enterprise, said the exchange rate depreciation in the official window resulted from the corrective reforms undertaken by the Tinubu administration.
According to him, the distortions in the foreign exchange market needed to be corrected for progress to be made in the economy.
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“The correction was necessary to ensure transparency and facilitate economic capital inflows. We must stress the certainty of those reforms,” he said.
However, the exchange rate depreciation had inflicted significant shocks on the economy. The weakening of the currency was exacerbated by the profound speculative assault on the money, creating a considerable confidence crisis in our forex ecosystem.
“The reform is a process, and we expect a restoration of confidence in a couple of months,” Yusuf said.
Ayodele Akinwunmi, relationship manager of corporate banking at FSDH Merchant Bank Limited, said the current administration is trying to reset the economy and put it on a sustainable growth path.
“We all know that the policies the government is trying to implement will bring about temporary pains such as Naira devaluation and a rise in the inflation rate. However, there are the short-term sacrifices for the expected strong economy in the medium to long term,” he said.
