Increasing Foreign Exchange Crisis: A case of tenacity and timely interventions[ ANALYSIS]

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In today’s global economy, consumers are used to seeing products from every corner of the world in their local grocery stores and retail shops. These overseas products—or imports—provide more choices to consumers. And because they are usually manufactured more cheaply than any domestically-produced equivalent, imports help consumers manage their strained household budgets.

The Nigerian Experiece

In recent years, Nigeria’s consumer goods imports have continued to rise amid the nation’s worsening foreign exchange crisis. Nigeria spent N1.22tn on consumer goods imports in 2021, according to the Foreign Trade Statistics of the National Bureau of Statistics.

This was a 109.25 percent increase from the N584.41bn spent on importing consumer goods in 2018.

The consumer goods imported into the country are categorized into durable, semi-durable, and non-durable. In 2018, Nigeria spent N148.52bn, N88.83bn, and N347.06bn on imported durable, semi-durable, and non-durable consumer goods respectively. In 2021, Nigeria spent N269.78bn, N144.42bn, and N808.69bn on imported durable, semi-durable, and non-durable consumer goods respectively.

The data shows that Nigeria spends more on importing non-durable consumer goods.  In a bid to arrest this unpleasant trend, the central bank of Nigeria proposed an altering of its foreign-exchange bidding rules to favor the production of goods that replace imports, in a bid to cut dollar demand.

The new rule, which was market-driven, will be prioritized making dollars available to manufacturers “who display verifiable progress in our imports substitution and job creation drive,” the regulator said in an emailed presentation.

High demand for the greenback is putting pressure on foreign-exchange reserves. which at $39.9 billion on Feb. 3 is the lowest in more than four months.

Not even the higher-than-normal oil prices have boosted the reserves as Africa’s largest crude producer is unable to fulfill its OPEC+ quotas due to crude theft and diversion of oil revenues to subsidize gasoline prices for its population.

It will be recalled that the apex bank adopted demand management and three devaluations since 2020 as it sought to make the exchange rate more reflective of market factors.

The banking regulator now supports “greenfield” and “brownfield” projects who want to produce goods currently imported into the country and also create jobs.

With this in place, one would naturally expect Foreign exchange support to be solely for the importation of spares, plants, and equipment needed to increase the production capacities of these companies.

A strong dollar may not always mean doom and gloom

A strengthening dollar and weak naira spell trouble for companies that import a lot of goods from countries. Since their imports are priced in dollars, those imports like cars, trucks, and other equipment become more expensive for the local consumers and businesses that have to pay for the imported goods at the exchange rate at the port. The value of the profits they make on import sales falls, as well, when they convert their local profits back to dollars.

But the dollar’s unfavourable exchange rate can also boost firms at home. That’s because when the dollar is strong, consumers may decide to buy indigenous used vehicles for fewer dollars, making the foreign used vehicles more costly in comparison.

While this makes it appear that Nigerian car users benefit when the naira weakens, the reality is not so simple. When the naira falls in value compared to the dollar, the price of imported raw materials like steel goes up in price and products like cars that are manufactured outside the country will cost more to buy.

 

The exchange rate is defined as “the rate at which one country’s currency may be converted into another. Typically, these rates fluctuate daily in response to the forces of supply and demand for different countries’ currencies. Nigeria, for instance, is an exporter of crude oil. If global demand for crude oil goes up in the international market, demand for the country’s currency, the naira, will also rise since companies will also need naira to buy the oil. 

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