“CBN’s Decision to Lift Forex Restrictions on 43 Items and Its Impact on Exchange Rates”
In a surprising turn of events, the Central Bank of Nigeria (CBN) has pointed to the 43 banned items, implemented in 2015, as a key factor contributing to the widening disparity between the official and black market exchange rates.
In a press release titled “WHAT YOU NEED TO KNOW ABOUT CBN’S LIFTING OF FOREX RESTRICTIONS ON 43 ITEMS,” published on its website, the CBN explained the reasons behind this change in perspective.
This FAQ-style guide intends to clarify the recent decision to remove the ban on these 43 items and its potential effects on the forex market.
According to the CBN, the decision to lift the ban was driven by the understanding that these restrictions had led importers to turn to the parallel market for foreign exchange, resulting in increased demand for foreign currency. Consequently, this additional demand pressured the parallel-market exchange rate, leading to higher prices.
The CBN’s statements imply that the 43 banned items unintentionally stimulated demand in the parallel market, significantly contributing to the ongoing depreciation of the naira.
Additionally, the CBN anticipates that by rescinding the ban, the gap between the official and black market exchange rates will narrow, as the pressure on the naira shifts from the parallel market to the official market.
It also acknowledged that the previously imposed FX restrictions had an impact on inflation, causing prices of affected goods to rise.
However, the CBN’s explanation is surprising, considering that companies seeking forex for items not restricted by the 43 banned items still struggle to obtain dollars in the official market. They are forced to turn to the black market, not by choice but out of necessity.
Furthermore, the central bank does not address the fact that the primary reason for demand pressure on the parallel market is the significant disparity between the official and black-market rates. Traders lack confidence in the official rate, leading them to sell on the black market.
It’s important to note that while the ban on the 43 items did introduce its own set of challenges, it is not the sole reason for the disparity between the official and black-market exchange rates.
The forex market in Nigeria is facing a fundamental issue – a deficiency in forex supply compared to demand. When the exchange rate was initially unified in June 2023, the premium of the parallel market over the official market was minimal. However, the evident lack of supply in the official market forced demand into the parallel market, exacerbating the issue.
As recent reports have shown, the official forex market experiences a daily turnover of only $100 million, emphasizing the extent of the supply problem.
To validate the notion that Nigeria is currently dealing with 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, despite the presence of the 43 banned items.
In essence, while the 43 banned items played a role, the primary challenge in the forex market is the significant shortage of forex supply relative to demand. This issue continues to put pressure on exchange rates in Nigeria.