For Nigeria to tackle its perennial foreign exchange (forex) crisis, the need to invest heavily in infrastructure and adopt competitive policies that would attract Foreign Direct Investment (FDI) inflow into the country has been stressed.
At a webinar organised by Cordros Capital Limited held at the weekend, the Senior Research Analysts, Cordros Securities Limited, Gbolahan Ologunro, while listing policy actions that could be implemented to address the nation’s lingering forex challenges, said the need for government to prioritise infrastructure could not be overemphasised, especially for national development.
He also listed the nation’s security challenge as a major disincentive to investment, urging the government to evolve new strategies to tackle the problem.
“If the manufacturing companies can not source raw materials locally, they have to go to the parallel market to demand dollars. We must address insecurity if we are to reduce the demand pressure in the parallel market emanating from operators unable to source raw materials.”
He pointed out that the exchange rate in Nigeria should be adjusted to reduce dependence on imports, incidence of capital flight, eliminate payment arrears and encourage local production.
According to him, poor infrastructure can severely limit Nigeria’s economic output and production base, thereby making the country to become more import dependent.
He said Nigeria had witnessed a lot of currency devaluation due to the emergence of COVID-19, which triggered a sharp slump in capital importation numbers from Q2, 2020.
He noted that investors exited the country and other emerging markets causing capital importation to decline by, 78.6 per cent to $1.3 billion representing a twelve quarter low within the period.
Foreign Portfolio Investment also plunged by 91 per cent to $385.3 million during the period due to capital flight arising from oil receipt shortages.
In addition, he pointed out that aggregate remittances from Nigeria abroad also plummeted by 27.7 per cent to $17.2 billion, worse than $19.7 billion recorded in 2016.
Consequently, the move by the Central Bank of Nigeria (CBN) to keep the Naira artificially stable has affected foreign investors sentiments.
To shore up investment in these segments, Ologunro said the government should articulate an integrated policy that would attract meaningful FDI into the country.
Furthermore, he argued that the problem of insecurity must be tackled urgently while also ensuring that the nation’s institutions are strengthened to enable them operate in an independent manner and efficient manner.
An investment Management analyst, Cordros Asset Management Limited, Akintoye Oyelakun stressed the need for the CBN to gradually unwind restrictions on items that are not eligible for forex in order to redirect market participants from the parallel market to the official window.
He pointed out that resumption of sale of forex to the Bureau De Change (BDC) would not augur well for the market, stating that operators deploy dollars generated from the CBN for their personal use. He also added that the BDCs sell dollars beyond the margin and guidance stipulated by the apex bank.
“You stop the sale of forex to BDC and reduce the level of supply to that market, you will definitely still have a high level of demand. There is disequilibrium.
“If you want to restore some clarity in that market, you need to look for a way to reduce the demand pressure and how do you achieve this? The CBN must begin to consider reducing those stiff restrictions on items that are not eligible for forex from the official sources.
“Currently the CBN has about 46 items on their forex ban list, so I think people who still need forex to import these items still make records to the parallel market, so if you intend to reduce the demand pressure in that space, why not gradually unwind those restrictions so that you will be able to redirect market participants from the parallel market to the official channels,” he said.
