CBN: Beyond 43 items’ return to official forex market

Recent policy statements by the Central Bank of Nigeria regarding the previously suspended 43 items probably have more to do with the regulator’s change of attitude to the parallel market than these items themselves. Whereas the bank may have taken this segment of the financial markets as an insignificant appendage to the forex market, its statements signify a volte-face that may augur well for the local financial markets.  

First, CBN announced on October 12, 2023, that it had decided to re-admit these items to the league of items eligible to access forex from the official market window.  This reversed a restriction placed on them by the institution eight years ago, on June 23, 2015.

A day later it offered explanations for its change of heart, which provided also a basis for expectations of an improved exchange rate regime going forward. “The restrictions pushed importers into the parallel market, contributing to the surplus demand for FOREX. This weakened the parallel-market exchange rate, pushing up prices,” it said in its addendum to the first notice announcing the lifting of the restriction on the items.”

The list of the items is long, but they include rice, cement, margarine, palm kernel, palm oil products, vegetable oils, meat and processed meat products, poultry and processed poultry products;  cold rolled steel sheets; galvanized steel sheets; wheelbarrows; head pans; metal boxes and containers; enamelware; steel drums; steel pipes, wire rods (deformed and not deformed); iron rods, etc.

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These are fundamental items in Nigeria, ranging from consumer goods to intermediate goods used in various sectors of the economy. They are major foreign exchange consumers, according to market operators. Therefore, the CBN cannot say the market that has supported these items for these eight years can be dismissed with a wave of the hand as being inconsequential.  

Underrating this segment of the market would mean running away from the truth. Instead, the monetary authorities should as a matter of policy strive to influence the activities there until there is convergence of rates.  Of late, there have been efforts to make the public disregard the market, including quoting the rates there, because it does not matter.

Anyone who holds such a position is living in denial. The truth is that the parallel market, to a large extent, determines the value of the naira. Some people say that up to 80% of forex transactions in Nigeria do not go through the official market. Another user of this market says that if the official market is doing $400m per period, “I can assure you that the parallel market is doing three or four times that”. That may be an exaggeration, but it might not be far from the reality.

Ask anybody, even those from government agencies, what the rate is, and they will give you the parallel market price. This is so because it is the reality. People who want to pay school fees for their children abroad are having difficulty doing so through the official window. Sometimes they are advised by their banks to go and source the funds from the alternative market.

Even after bank customers have filled out Form A for application for school fees or medical expenses, these forms stay with the commercial banks for up to three months without being processed. In the end, the applicant is forced or advised by the same bank officials to go to the parallel market.

In such a situation, does it make sense to ask people to not reference the parallel market in their cost permutations? As far as such persons are concerned, the official market does not exist in reality; it only exists on paper.

CBN declared that the rise in exchange rate in the parallel market as a result of the 43 items’ restriction led to cost-push inflation in the country. The bank argues that manufacturers who accessed forex at such high exchange rates were bound to charge high prices for their products since they have to recover costs and add some margin for profit.

But the fact is that it is not only those who bought forex from this market that based their pricing on the prevailing rates in the “black” market, to use the term that many people now say is inappropriate. The simple truth is that every person who charges prices for anything at all now uses the alternative market rate as their benchmark. This includes those who get their forex from the I&E window. When they fix their prices, is there any agency of governments that inspects their books to cross-check the relationship between their input costs and product prices, to determine what exchange rates they based their prices on? Even sellers of ugu, the popular vegetable in Nigeria, raise their prices and also cite the dollar exchange rate as the reason. This is the reality in Nigeria today.

This is why the new scenario being painted by CBN may be difficult to implement or achieve. When manufacturers subsequently buy their forex at the official rates, is there any guarantee that they will automatically reduce their prices? Implicit in this is the assumption that the bank will meet all the demand for forex. Is this possible? In any case, is it only FX as a cost component that has risen? What has happened to power (electricity and diesel, etc), and other variables?  

All the same, CBN is quite optimistic that its measures will have a salutary effect on the economy. “Local production will benefit from cheaper imported inputs, and consumers will benefit from cheaper retail products. The policy is suitable for a unified FOREX  market and positive as well for inflation. It is expected that employment generation will be boosted as closed factories re-open. Price stability will benefit the economy and the standard of living in general,” the bank said.

If the monetary authorities want to stabilise the naira, this cannot be done from the official market, operators assert. They say this will not be possible, insisting that this can only be achieved through the parallel market because, according to some of them, that is where the value of the naira is determined in the economy.

So, it is encouraging that the central bank has in a way admitted that there is a problem. Let it take care of the black market. This is why many people believe that the lifting of the suspension on the 43 items “is a step in the right direction”, as we say in Nigeria.

The next step is for the bank to beam its search light on the commercial banks. How are these banks disbursing the forex that the central bank is releasing to them to sell on the I&E window? The CBN should be interested to know who gets what at what cost and through what processes.

It makes little sense to say that so much forex is being pumped into the system through the banks while they are becoming obstacles to the smooth percolation of these funds into the system.