Pundits in Nigeria’s financial space are raising eyebrows over the widening gap of the country’s exchange rate differentials, describing the scenario as increasingly precarious.
Recently, Chairman of the Presidential Economic Advisory Council (ECA), Dr. Doyin Salami, raised the issue during the National Economic Outlook for 2021 organised by the Chartered Institute of Bankers of Nigeria (CIBN).
Salami said official payment data showed that approximately US$30 billion (almost 10 percent of the national economy) is obtained from sources outside the CBN, adding that the gap between the official and other exchange rates is a source for concern.
Salami said by the measure that drives the value of the naira based on the naira/dollar inflation differential, the currency should be trading around N439/$ at the official market.
He said uncertainty around foreign exchange – convergence, market-reflective rates, and transparent determination mechanism, Balance of Payment imbalances are large and would remain key questions in 2021.
As of yesterday, while the dollar to naira exchange rate hovered around N380 to the dollar, the black-market rate ranged between N471/N475 to the dollar.
Although the CBN’s move recently to narrow the gap by implementing the policy to receive foreign the currency of the country of origin in Nigeria, the gap has been slow in contracting, almost two months on since the policy started being enforced.
It may be recalled that before the enforcement of the policy, the exchange rate on the black-market shot up to more than N500 to the dollar.
Hinting that the pressure on the local currency is caused by excess importation of foreign goods, Salami said, “Despite border closure, our national import of food amounted to N1.85 trillion between January and Sept 2020 – a 62 percent increase when compared to the same period in 2019. This suggests a weakness in our ability to feed ourselves and raises the need to consider review of intervention policies in agriculture.”
He said agriculture continues to decelerate, growing at 1.7 percent year-to-date while consumer-sensitive sectors like manufacturing and distribution continue to contract, in double digits.
According to him, serious climatic concerns are undermining agricultural output with 2.5 million farmers being impacted by flooding in 2019.
Preliminary assessments suggest that 2020 was worse with persistence into 2021 to adversely affect output and food prices.
Nigerians’ spending on food rose significantly in 2019, according to a report by the National Bureau of Statistics (NBS).
The discrepancy creates a disincentive for foreign investors, who cannot bring in their capital through the backdoor despite the higher rate prevailing there since they would not receive a certificate of capital importation, which would make it difficult for them to take capital and profits out of the country, Abiola Rasaq, a Lagos-based financial analyst argues.