Local Nigerian economists and business people acknowledge that Nigeria’s naira is overvalued. They tend to focus, however, more on the issue of foreign currency supply versus demand – the latter greatly exceeding the former.

One senior private equity manager, for example, suggested that the Central Bank of Nigeria (CBN) should simply let the market work and enable a greater local supply of dollars.

He observed that one participant in a recent meeting between bank governor Godwin Emefiele and business leaders bemoaned his company’s need for CBN approval even to use foreign exchange generated from the company’s own exports in order to import essential goods.

Recently released statistics suggest the CBN supplied around US$900 million of foreign exchange to Nigeria’s banks in March – barely one-tenth of current monthly foreign exchange demand. Zenith Bank received the highest allocation.

Officials at the Nigeria Customs Service recently noted that a reduction of approximately ₦230 billion (US$1.2 billion) in 2015Q4 revenues, specifically due to CBN restrictions, is causing a major imports backlog.

A currency swap

The CBN’s recent revelation that it has agreed to a yuan currency swap with the Industrial and Commercial Bank of China (ICBC), one outcome of President Muhammadu Buhari’s recent week-long mission to China, could reduce the demand–supply imbalance. That is particularly so if importers of Chinese goods decide to settle and take out letters of credit in yuan rather than dollars.

Some welcome the move, as both the availability of dollars and the willingness of dollar-constrained banks to issue dollar-based letters of credit remain major domestic issues.

Domestic critics, however, question the reported ₦30/RMB pricing of the swap. They point also to the implications of a swap between state institutions rather than private-sector banks, and to the adverse effects of potentially increased imports of cheap Chinese goods on Nigerian manufacturers.

Forex allocations

In the meantime, the CBN has increased foreign exchange allocations to Nigerian manufacturers, according to the Manufacturers Association of Nigeria.

Moreover, if the Nigerian National Petroleum Corporation (NNPC) is to be believed, fuel importers/marketers are set to benefit from up to US$200 million in foreign exchange to boost imports as the NNPC’s share of Nigeria’s officially allowed fuel imports is reduced from around 80% to just over 40%.

Stock market echo

Some believe this move could distort the foreign exchange market.

Others are voting with their feet, reducing their holdings of Nigerian equities to the extent possible given currency restrictions.

Indeed, market analysts now suggest investors that are unable to withdraw funds from Nigeria are reinvesting in stocks, and that the CBN’s restrictions make Nigeria ‘uninvestable.’

The providers of the high-profile MSCI Frontier Markets index appear to have a similar opinion, stating that they will announce a decision on whether to withdraw Nigeria from the index on or before 29 April.

Like previous withdrawals of Nigerian bonds from emerging/frontier market bond indices, such a move would reduce the need for funds tracking or ‘replicating’ the index to invest their almost US$0.5 billion in Nigerian stocks specifically for this purpose.

The Nigerian Stock Exchange (NSE) has already lost enough of its value this year without the added effects of this eventuality.

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