Months after the Central Bank of Nigeria (CBN) stopped the sale of Foreign Exchange (fx) to Bureau De Change (BDC) operators and promised to boost liquidity in commercial banks, the scarcity of forex has worsened as the exchange rate on the parallel market has reached a new high of almost N600/$1. The hardest hit is the manufacturing sector. Travellers, who were frustrated by the scarcity, are forced to patronise BDC operators. If the situation persists, it is likely to cause massive job layoffs as a result of rising cost of production. This is going to have unpleasant consequences for the economy.
To make matters worse, commercial banks have limited customer’s access to forex, often placing a ceiling of just $20 for online transactions. And for Business Travel Allowance (BTA), some customers have complained that they get not more than $2,000 from their banks. This is about 30 per cent of the amount an average traveller requires. But the experiences of manufacturers are by far worse. In most cases, an average manufacturer is said to require an invoice of about $450,000 to import materials, only to be allocated a fraction of what is needed as foreign exchange.
Beside the big time manufacturers, small-scale industries are groaning under the paucity of forex. All of this has a multiplier effect on the economy, especially in the nation’s Gross Domestic Product (GDP). The CBN should quickly intervene and give priority to manufacturing industry and other key sectors that depend largely on forex for the importation of raw materials. Recently, the Manufacturing Association of Nigeria (MAN) called for government’s urgent intervention on the rising prices of diesel and petrol, which led to high cost of goods and services. The development has worsened the ease of doing business, and inflation rate. The dollar scarcity has also badly affected indigenous companies, especially those engaged in exportation. If the scarcity continues, many local industries may not be able to produce at optimal level, and might be forced to shut down, thereby worsening the unemployment rate, put at over 35 per cent.
There is need to boost Nigeria’s non-oil exports and earn foreign exchange. As long as Nigeria continues to depend so much on imported goods, whether essential or not, so long will the scarcity of forex linger. Some years ago, the CBN banned the disbursement of forex on 41 items as a way to boost local production of those products, but that policy has not substantially enhanced the availability of forex for those who need it.
Due to high importation of essential materials, Nigeria’s trade deficit rose to N40.94trillion between January 2017 and March 2021. Nigeria earned only N4.22trillion on export of manufactured goods within the same period. According to the Foreign Trade report of the National Bureau of Statistics (NBS), in 2020, Nigeria import bill increased to N12.71trillion, while export dropped below N1trillion. The present scarcity of forex may be a reflection of demand exceeding supply. However, it shows that the decision of the CBN on the forex market did not achieve the set objective. When the apex bank took what was considered a major step towards full exchange rate harmonisation after uploading the Investors and Export (I&E) window (also known as NAFEX), it was believed that it would boost liquidity and close the gap between the official and parallel markets.
Unfortunately, the initiative did not work. Prior to that intervention, the country adopted the multiple exchange rates in order to avoid outright devaluation of the naira. Under the system, the stronger pegged rate was for official transactions while the weaker exchange rate was for non-government related transactions. The government’s plan to ensure liquidity in the forex market as well as timely execution and settlement for legitimate transactions seemed to have failed.
Clearly, the CBN has seemingly not succeeded in clearing the dollar demand backlog; reduce the gap between official and parallel rates, which would have given the much-needed boost to the economy. The forex market requires a more forward-looking approach. Let it be adequately funded. But most importantly, the diversification of the economy should be given more impetus, with focus on non-oil exports that will earn the country huge foreign exchange that will strengthen the value of the naira. These must be urgently addressed to avoid a possible devaluation of the naira by the end of the year, an option that experts have cautioned, may worsen the situation.
To avert the looming danger, the CBN must intervene now and curb the adverse effects of forex scarcity. We also advise MAN to keep the CBN abreast of the situation and its likely impact on the economy.