In a remarkable U-turn, the Central Bank of Nigeria (CBN) has attributed the widening disparity between official and black market exchange rates to the 43 banned items implemented in 2015.
The CBN conveyed this change in perspective through a press release titled “WHAT YOU NEED TO KNOW ABOUT CBN’S LIFTING OF FOREX RESTRICTIONS ON 43 ITEMS,” which was published on its website.
This FAQ-style explainer aims to elucidate the recent decision to lift the ban on these 43 items and underscore its impact on the forex market.
According to the central bank, the lifting of the ban was motivated by the realization that these restrictions had compelled importers to resort to the parallel market, creating additional demand for foreign exchange.
This, in turn, exerted pressure on the parallel-market exchange rate, resulting in higher prices.
These comments from the CBN imply that the 43 banned items inadvertently stimulated demand within the parallel market, thus contributing significantly to the ongoing depreciation of the naira.
Furthermore, the CBN suggested that by rescinding the ban, it anticipates a reduction in the gap between the official and black market exchange rates.
- “In recent months, the widening premium between the official rate and the parallel market indicates that the rate has not been setting a clearing price.”
- “Importers of these products rely on the parallel market to source FX for importing these goods. This puts additional demand pressures on the parallel market, thereby widening the gap with the official rate and permanently segmenting the market.”
- “Removing these restrictions eliminates the need for importers of these products to go to the parallel market, reducing the pressure on the naira.”
- “The hitherto FX restrictions had implications on inflation, causing the prices of affected goods to increase.”
What does this mean
The central bank is basically stating that by lifting the ban on the 43 items, the pressure on the naira will reduce in the parallel market as the demand there will shift to the official market.
- It also claimed that the restrictions contributed to inflation, causing prices of affected goods to increase.
- It is also for the first time officially admitted that there is a wide premium between the official and black-market rates.
Alternate truth?
The explanations provided by the central bank is rather surprising especially when you consider that companies seeking forex for items not restricted by the 43 banned items cannot still get dollars on the official market.
- Rather, they also patronize the black market not because they want to but because that is the only market where they can get some of their forex needs.
- In addition to lack of liquidity in the official market, the central bank is also not stating clearly that the major reason why demand pressure is on the parallel market is the disparity between the official and black-market rates.
- The disparity is also because traders do not believe the official rate is reflective of reality and as such, even those with actual supply prefer to sell on the black market to the highest bidder.
It is worth noting that the central bank’s statement lacks a clear acknowledgment of the primary challenge facing the forex market: a deficiency in forex supply that outweighs demand.
While the ban on the 43 items did introduce its own set of problems, it is not the sole reason for the disparity between the official and black-market exchange rates.
Readers may recall that when the exchange rate was initially unified on June 14th, 2023, the premium of the parallel market over the official market was negligible, hovering around the acceptable 5% threshold.
However, as it became evident that there was a dearth of supply in the official market, demand flowed into the parallel market, exacerbating the issue.
A recent report by Nairametrics revealed that the official forex market was witnessing an average daily turnover of only $100 million, underscoring the extent of the supply problem.
To further validate the notion that what Nigeria is currently experiencing is a currency crisis leading to supply constraints, we can look back to the period between 2018 and 2019 when the exchange rate remained stable at N360/$1.
During this time, Nigeria attracted over $20 billion in foreign portfolio inflows into the economy, despite the presence of the 43 banned items. (Nairametrics)
