CBN’s forex access to 43 items sees analysts weigh in
October 16, 20231K views0 comments
…denied access to I&E Window for Forex
Onome Amuge
The decision by the Central Bank of Nigeria to grant forex access to enable importation of 43 items eight years after restriction, has been praised by some finance and economic analysts, as well as international organizations like the International Monetary Fund (IMF), who believe that it will strengthen the naira in both the official and BDC segments of the foreign exchange market.
Some analysts have attributed the decline of the naira to the previous forex denial on importing 43 items, which led to increased demand for dollars. They also noted that Yemi Cardoso,the new CBN governor, has taken proactive steps to address this issue by lifting the forex restriction on the 43 items.
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On the contrary, others have expressed concern that the policy could lead to an increase in imports, which could have a negative impact on domestic production and job creation. They also noted that increased imports could weaken the naira and exacerbate the current account deficit. Additionally, lifting the forex restriction could have unintended consequences for other industries, such as agriculture and local manufacturing, which could suffer if they are unable to compete with cheaper imported goods.
On October 12, the CBN released a circular to notify the public that the forex restriction on the importation of 43 items by the previous CBN Governor, Godwin Emefiele, has been lifted.
The 43 items consist of agricultural products, including rice, margarine, palm kernel, palm oil products, vegetables and processed vegetable products, poultry, processed poultry products,tinned fish, vegetable oils,meat and processed meat products and tomatoes/tomato paste. Industrial products, including cement,cold rolled steel sheets, galvanized steel sheets, roofing sheets, wheelbarrows, head pans, metal boxes, containers, enamelware, steel drums, steel pipes, wire rods, iron rods, wire mesh, reinforcing bars,steel nails,security and razor fencing and poles,wood particle boards and panels,wood fiber boards and panels,plywood boards and panels.
Other items include; wooden doors,toothpicks,glass and glassware,kitchen utensils,tableware,tiles-vitrified and ceramic,gas cylinders, woven fabrics,clothes,plastic and rubber products,polypropylene granules,cellophane wrappers and bags,soap and cosmetics and Eurobond/foreign currency bond/ share purchases
The ban had been implemented in 2015 by Godwin Emefiele, the former CBN governor, to reduce foreign exchange demand for imported products, create jobs, and conserve foreign reserves. However, it led to increased reliance on the black market for foreign exchange, which weakened the naira and pushed up prices. The removal of the ban is expected to alleviate these issues.
Explaining the reason for lifting the ban, the apex bank in a statement signed by Isa AbdulMumin, the CBN’s director of corporate communications,said “The CBN wants to ensure price stability and is seeking to boost liquidity in the Nigerian Foreign Exchange Market. As liquidity improves, we expect the distortions to moderate.
“The CBN wants to promote orderliness and professional conduct by all Nigerian Foreign Exchange Market participants to ensure market forces determine exchange rates on a Willing Buyer – Willing Seller principle. The CBN wants a unified market for FOREX with flexible and transparent pricing.”
The CBN stated that removing the ban on importing these items will improve the effectiveness of monetary policy tools, and create a unified and functional foreign exchange market where prices are determined by supply and demand.
According to the CBN, by removing the restrictions on importing these items, the exchange rate will be allowed to adjust to clear the market, ensuring that there is always supply. This,it stated, will reduce the demand for foreign exchange in the parallel market, which has been contributing to the inflationary pressure on the prices of affected goods. The removal of these restrictions is also expected to have a positive impact on inflation and the naira.
Some financial analysts believe that lifting the restrictions on importing 43 items is the most significant foreign exchange reform since the naira was devalued in June, and will be welcomed by investors and analysts who had criticized the restrictions as a form of capital control. They also believe that importers of these items will now be able to access foreign exchange at a lower cost through the official market window.
Muda Yusuf, the CEO of the Centre for the Promotion of Private Enterprise (CPPE), believes that the CBN’s decision will reduce the premium between the official and parallel market rates, and remove distortions in the foreign exchange market. He attributes this to the exclusion of the 43 items, which was one of several factors that caused distortions in the foreign exchange market.
Yusuf observed that the exclusion of the items from the official market also contributed to the persistent divergence in rates between the official and parallel markets. He further argued that the exclusion was not aligned with existing trade policies, and reflected a lack of policy coordination under the previous administration.
The CPPE CEO believes that the new directive will improve transparency and disclosures in foreign exchange transactions, but warned against the suppression of the Bureau de Change segment of the forex market.
Yusuf advised the CBN to avoid market suppression, particularly outside the Investors and Exporters window. He also urged fiscal authorities to monitor the economic landscape and shape fiscal policy measures accordingly, in accordance with comparative advantage principles.
“We need to worry about the risk of import surge. There is also a need to upscale the use of fiscal policy measures to boost domestic production and productivity,”he said.
Uche Uwaleke, a professor of Finance and Capital Markets at the Nasarawa State University and president of the Association of Capital Market Academics of Nigeria (ACMAN),argued that the decision to allow the importation of the 43 items will cause a gain for the naira, but may also threaten local manufacturing efforts and undermine the government’s efforts to promote import substitution. He also notes that while the immediate impact will be a reduction in the premium between the official and parallel markets, the long-term effects may be less positive.
Paul Alaje, a senior partner and economist at SPM Professionals, disagrees with the decision to remove the restrictions on the 43 items. He argued that the move was not well thought out, and could lead to further weakening of the naira. He believes that the focus should be on increasing foreign exchange revenues, rather than demand stimulation policies.
Ibifiri Bobmanuel, president of the Rivers Entrepreneurs & Investors Forum (REIF), believes that lifting the ban on importing the 43 items will have an impact on inflation. While it may help to reduce inflation rates, it could negatively affect the manufacturing sector, as local manufacturers may not be able to compete with larger, more organized businesses that can now import these items.
“ I think for us as businesses in the country, our greatest challenge is the fact that the policy directions are not cleared out and we are faced with this back and forth flip flops of such policies. You could remember, eight years ago, such imports were allowed into the country and one morning one day we just woke up and they were banned and today we are going back to where we started off from. It simply means that we are not really making progress in our drive for national manufacturing.”
The REIF president opines that lifting the ban on importing the 43 items could reduce inflation rates in the short term, as foreign products such as rice, tomato paste, and others will become more widely available and affordable. However, he cautions that it could shrink the manufacturing sector, as local companies may not be able to compete with foreign imports, leading to job losses and an increase in costs for businesses trying to expand.
Analysts at CardinalStone Research see the lifting of restrictions on the 43 items as a move to improve confidence in the foreign exchange market, which had been negatively impacted by a lack of liquidity and unorthodox policies. They noted that the original ban was put in place due to a significant drop in foreign exchange inflows, and suggested several measures to improve the supply of foreign exchange, such as raising dollar facilities, asset sales, and securing concessionary loans.
They contended that curbing oil theft, increasing domestic oil production, and issuing new oil mining licenses could be short-to-medium solutions for improving foreign exchange inflows.
CSL Stockbrokers appreciate the need to eliminate distortions in the foreign exchange market, but believe that the best solution is to increase foreign exchange revenues. To achieve this, they suggest reducing crude oil theft to increase production, and starting up the Dangote refinery, which will bring in a significant amount of foreign exchange.