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Foreign Exchange Demand Declines by $9bn Over 12 Months—Central Bank Report

The demand for foreign exchange by individuals and companies seeking to import goods and engage in forex-related activities fell by 42 percent year-on-year, according to the latest data from the Central Bank of Nigeria.

An analysis of the total sectoral utilisation of foreign exchange revealed that 19 sectors and services received an allocation of $21.12 billion in 2023. However, this figure represents a reduction of 41.9 percent, or $8.87 billion, from the $29.98 billion disbursed to industry players in 2022.

These financial metrics were contained in the quarterly statistics report published by the CBN.

Foreign exchange allocation refers to the process through which the CBN distributes foreign currencies to various sectors of the economy, including individuals, businesses, and government agencies, based on specific criteria and priorities.

In June 2023, the CBN adopted a floating exchange rate system for the naira, unifying all forex market segments and consequently leading to a notable depreciation of the domestic currency against the United States dollar and other major global currencies.

The CBN stated, “The Central Bank of Nigeria wishes to inform all authorised dealers and the general public of the following immediate changes to operations in the Nigerian Foreign Exchange Market: Abolishment of segmentation; all segments are now collapsed into the Investors and Exporters window.”

This move led to an immediate decline in the value of the naira, with the local currency falling from 471 per US dollar to approximately 1,485 per US dollar on the Investors and Exporters FX window.

As the exchange rate continued its volatility, the naira further weakened in the parallel market, reaching 1,500 per US dollar last week.

The reduced gap between the official and parallel markets has compelled importers to decrease their forex demand for goods or raw materials, affecting manufacturers, healthcare, education, and travel expenses.

Financial experts have also suggested that this scenario might indicate insufficient forex liquidity from the central bank, leading dollar buyers to turn to the parallel market.

A breakdown of the document showed that the CBN disbursed $14.27 billion to seven sectors for the import of raw materials and spare parts and $6.84 billion for invisible services in 2023. This represents a decrease of $8.87bn from a combined release of $18.2bn for imports and $11.76bn for invisible services allocated in 2022.

These sectors include industrial, transport, agricultural, oil, food products, manufactured products, and minerals.

In the invisible category, the bank released foreign exchange for business services, communication, construction and related engineering, distribution, education, environmental, financial, health-related, and social services, tourism and travel-related services, recreational, cultural, and sporting activities, transport, and other services.

Meanwhile, the Governor of the Central Bank of Nigeria, Dr. Olayemi Cardoso, has disclosed that the foreign exchange inflows recorded in the first quarter of 2024 into Nigeria were about 136 percent of the total inflows recorded in 2023.

The CBN governor, represented by the Director of Risk, Blaise Ijebor, stated, “We remain committed to using all the orthodox monetary policy tools available to us to address inflation. We have also embarked on major reforms to liberalise the foreign exchange market, which has enhanced transparency, reduced arbitrage opportunities, promoted stability, and improved liquidity in the market.”

Although enhanced liquidity has recently facilitated the resolution of all FX backlogs, the stabilisation of the naira in the exchange market remains an ongoing process that has yet to reach full fruition.

Experts have emphasised the need for the Federal Government to urgently increase crude oil production to bring in dollars and ease the pressure on the local currency, as the country’s borrowing capacity is currently constrained.

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