Edge's News: Nigeria's FX Challenges

With pressures mounting on the nation's reserves in the first nine months of the year, several positive developments in Q4-2021 helped to bolster the CBN's gross reserves position including the Debt Management Office (DMO) issuance of $4.0bn worth of Eurobonds, SDR allocation from the International Monetary Fund (IMF), and stronger oil prices. Overall, external reserves rose by $5.2bn in 2021 to close at $40.5bn as of Dec-21, representing a 14.5% rise from Dec-2020.

However, in recent months, external reserves is facing renewed pressures as the nation's import bill has continued to climb particularly in the face of global inflationary pressures which has resulted in a surge in cost of importing key commodities (such as PMS, food products and other raw materials). 

The CBN continues to remain the main supplier of FX in the country given foreign investors continue to remain on the sidelines due to fears of an overvalued naira, artificially low interest rate and pre-election concerns. 

Although oil price continues to rally at neck-breaking pace, production inhibiting concerns (oil theft, technical inadequacies, and deficient infrastructure investment) continue to weigh on oil output. Thus, gains from higher prices are lost to weaker production levels.  As a result, external reserves have fallen 4.2% from its four-month peak of $41.8bn to $39.9bn.

Clearly, the CBN is under severe pressure which has become evident in its recent FX policies where it has decided to ration FX supply to prioritise manufacturing companies that support its import substitution objective. 

To solve Nigeria's persistent FX concerns, the long-term solution lies in bolstering our productive capacity to reduce import dependence and increase product offerings to the international community to boost FX earnings. However, to achieve this, significant fiscal and regulatory interventions will be required to make the operating environment friendly for businesses to thrive. 

In the short term, the CBN's quick fix would be to attract some "hot money" back into the economy, a move that would involve another currency devaluation and higher interest rates.