A fortnight ago, we wrote about the plunge of the Nigeria Naira and tabled the argument that the new administration could seize the opportunity, given its indication of a free market inclination, to allow the country's foreign exchange market to recalibrate.
It comes as no surprise that in its latest move, the Central Bank announced lifting the 8 years old hard currency access restriction on 43 items (among them rice, cement, margarine, palm kernel, palm oil products, vegetable oils, meat and processed meat products) imported into the country. This means that importers of the products can now freely purchase foreign currency in the open FX market, unlike what has been the case since 2015 when the restrictions came into force.
This is significant development that investors should take note of. The following are worth bearing in mind:
- This a pointer that finally, the market regulator has accepted that hard currency access restrictions are counter productive since the net effect is to push importers into the parallel market and amplify the spread that exists between the formal rate and that in the parallel market
- This a statement by the Central Bank on the commitment to push further the June 2023 efforts towards unifying the formal and parallel markets. Lifting controls which have been place for close to a decade is a signal of a policy bold shift, especially in the present environment in which the US dollar has rallied significantly against frontier market currencies
- It will be interesting to observe the conduct of monetary policy following the latest move given that the Central Bank postponed the September 25th and 26th monetary policy committee meeting. As indicated in our analysis a fortnight ago, we anticipate further tightening in the months ahead. Since the start of 2023, the benchmark rate is up 125.0 basis points to 18.75% and we foresee a scenario where the rate closes 2023 at 20.0%
- In the medium-term, the lifting of hard currency restrictions should help ease inflation in the economy owing to the supply side related pressure that has been impacting the headline figure. This view is predicated on the fact that inaccessibility of basic food items such as rice and vegetables has been a key driver of headline inflation in Nigeria and lifting hard currency restrictions should help in the supply of such products in the local market
