Due to foreign exchange (FX) scarcity, the arbitrage gap between the Investors and Exporters’ (I&E) window and the parallel market in Nigeria has widened to about N100. The Economic Intelligence Unit (EIU) predicts that the Central Bank of Nigeria (CBN) will revert to “heavier management of the exchange rate in late 2023 to tame rapid price rises.”
As of the recent data, the naira closed at N775.76 to a dollar on the I&E window, while it sold at an average of N870 to a dollar at some parallel market points in Lagos.
The widening gap between the I&E window and the parallel market is an indication that the significant difference that was present before the FX unification is returning. The EIU, an arm of The Economist Magazine, stated this in its Country Report on Nigeria.
The report highlights that without adequate FX supply and with the naira depreciating, petrol prices without subsidy are expected to increase. The impending protest and strike by organized labor could further exacerbate the already dire situation.
The FX unification resulted in major foreign exchange losses for some companies. MTN Nigeria Communication Plc, Nestle Nigeria Plc, and others suffered N486.82 billion foreign exchange losses in the first half of 2023.
In response to the FX rates unification, President Bola Tinubu appointed Jim Osayande Obazee, a former Chief Executive Officer of the Financial Reporting Council of Nigeria, as Special Investigator of the CBN and related entities. Obazee has been working with the Department of State Services (DSS) during the investigation of Godwin Emefiele, the suspended CBN Governor.
The EIU forecasts that the naira will be under significant pressure in the near term due to high and rising inflation, and it expects a return to heavier exchange-rate management from the second half of 2023. The CBN, according to official data, has the capacity to increase market intervention, but foreign investors may be unnerved due to access restrictions on various imports.
Overall, the report projects Nigeria’s real Gross Domestic Product (GDP) growth to slow to 2.3 per cent in 2023 and 2.5 per cent in 2024 due to rapidly rising inflation and monetary tightening. The current account is expected to remain surplus, but inflation will likely be above the nine per cent target ceiling. The CBN is anticipated to prioritize stimulus over its price stability mandate.
In terms of companies’ performance, those with foreign-denominated transactions experienced significant foreign exchange losses due to the naira devaluation in June 2023. MTN Nigeria, Nestle Nigeria, and Dangote Cement were among the firms affected, reporting substantial losses in the first half of 2023.
It’s worth noting that President Tinubu’s appointment of Obazee as Special Investigator at the CBN and related entities might involve reshuffling of personnel within the institutions, possibly impacting the positions of Deputy Governors of the apex bank.