The Nigerian naira has been in freefall on the parallel market, hitting a record low of 980 naira to the dollar on Tuesday. The central bank has said it will intervene in the foreign exchange market occasionally to boost liquidity, but some analysts have warned that the naira may continue to weaken.
The CBN has halted forex restrictions on 43 items in Nigeria, which is expected to boost the supply and availability of dollars in the country and ease the pressure on the naira. However, the policy faced criticism from various stakeholders, who claimed that it was hurting the economy and creating opportunities for corruption and smuggling.
The CBN has reversed the policy after more than six years of implementing it, citing improved macroeconomic conditions and increased forex inflows as the reasons for the policy shift. The CBN governor said that the policy had achieved its objectives of reducing import dependence, enhancing domestic production capacity, creating jobs, and boosting non-oil exports.
Some analysts warn that lifting the ban could worsen the trade deficit and increase external debt. Foreign exchange inflows from non-CBN sources have increased, widening the gap between official and parallel market prices.
The PWC report suggests that Nigeria still has a long way to go in recovering from the slump in foreign exchange inflows into the economy, as the country is projected to suffer further decline.
The report also noted an increase in foreign exchange inflows from independent or non-CBN sources, widening the gap between official and parallel market prices. Additionally, the report warned that rising public debt could worsen the country’s credit ratings and increase borrowing costs.
It highlighted five suggestions, including:
- Boosting investor confidence by clarifying Nigeria’s FX management story
- Managing for flexibility and shocks by withstanding external shocks with a pocket of sequenced policy execution
- Short-term fixes to enhance foreign exchange liquidity
- Deepening financial markets
- Longer-term sectoral policies to maximize exports or deepen domestic consumption
Nigeria will need time to recover from the drop in capital imports, according to Dr. Muda Yusuf, Director/CEO of the Centre for the Promotion of Private Enterprise (CPPE).
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