CBN’s forex fight

The Central Bank of Nigeria (CBN) has issued a circular limiting International Oil Companies (IOCs) to immediately repatriate only 50% of…

The Central Bank of Nigeria (CBN) has issued a circular limiting International Oil Companies (IOCs) to immediately repatriate only 50% of forex proceeds, with the rest after 90 days, due to forex market liquidity concerns. CBN has also announced plans to collaborate with the Office of the National Security Adviser (ONSA) to tackle speculative activities in the forex market. Amidst all this, Nigeria’s naira hit a new low of ₦1,730 against the US dollar as of the time of writing. Meanwhile, the Economic and Financial Crimes Commission (EFCC) raided Bureau De Change operators suspected of currency speculation.

Since the new CBN management came on board, it has been rolling out new initiatives to boost the country’s foreign reserves, restore investors’ confidence and address the declining value of the Naira. In theory, the decision to float the Naira and unify the exchange rate in 2023 appeared to be a sound strategy, as economists had long argued that the Naira was significantly overvalued and that floating the currency would alleviate pressure on the foreign reserves. However, the current situation in Nigeria has proven illogical, as the value of the Naira has plummeted by more than 150% in just nine months, sparking concerns that the situation could deteriorate further, especially given the CBN’s limited ability to support the currency. The order to force companies to retain their dollars in Nigeria and the use of military force to harass currency traders only serve to create more chaos and desperation in the market. While the CBN intends to manage liquidity in the domestic forex market, the implications of this policy are multifaceted. Nigeria has a history of implementing restrictions that often yield unintended consequences. For instance, border closures did not lead to the expected reduction in food prices, and previous restrictions on forex for specific items failed to resolve the forex crisis. This new approach to repatriation aims to strike a balance between liquidity management and the interests of IOCs. The 90-day timeline for repatriation poses challenges for the distressed oil sector. Operators within the industry, some of whom are already divesting from onshore operations, now have to contend with additional hurdles. Intending investors in Nigeria’s oil sector may find this timeline discouraging. Given the sector’s urgent need for investments to enhance production capacity, any roadblocks to operators could hinder growth. The FX gymnastics undertaken by the CBN in the past few weeks has done little to salvage the Naira’s persistent decline. Going by the example from the Emefiele years, there is very little that efforts from monetary policy can achieve if the market does not see any tangible action from the fiscal authorities. Presently, it appears that the CBN is employing a trial-and-error approach to address the situation. BDCs have been the saving grace of several manufacturers — heightened by the FX ban on 33 items, which has now been lifted. If the dollar supply is insufficient for the country’s needs, the CBN will only keep shooting arrows in the dark. In its attempt to address the country’s economic challenges, the Nigerian government is taking short-sighted and counterproductive measures. Instead of relying on force, the Central Bank of Nigeria should have engaged in dialogue with the oil companies and offered them incentives to remain in the country. Only by creating a welcoming and supportive environment for businesses can Nigeria hope to attract investment and create a more stable economy.