Clearing FX backlog is considered to boost investor confidence and stabilise naira – Analysts characterised the Central Bank of Nigeria’s (CBN) proposal to reduce the foreign exchange (FX) backlog in the next two weeks as a positive development that will help rebuild economic confidence.
The CBN’s acting governor, Folashodun Adebisi Shonubi, stated on Monday that the central bank has been debating reducing the foreign exchange backlog for some time. “We anticipate resolving this within the next two weeks,” he added.
According to him, this implies that the duty overhang that people are constantly discussing won’t exist.
The decision will assist stabilise the naira and restore investor confidence in the economy, according to every analyst surveyed by BusinessDay on Wednesday.
If it works, it will be a significant tool for boosting self-assurance. In the short run, it will at the very least assist in lowering demand in the black market, according to Razia Khan, managing director and chief economist of Standard Chartered Bank’s Africa and Middle East Global Research.
She did point out that it does give banks a new USD duty, since eventually CBN FX reserves will need to be used for repayment.
However, the advantages of short-term NGN stabilising probably exceed the disadvantages. In an email answer to BusinessDay, Khan stated, “The settlement default by CBN from earlier months’ forward transactions is not good for confidence and has been a probable factor in the parallel market overshooting.”
Chief Executive Officer of Economic Associates and economist Ayo Teriba stated, “Backlog means two things (a supply shortfall and excess demand).” Excess demand is equivalent to a supply shortfall, indicating that there is a greater demand than supply for foreign exchange.
He stated that the CBN is increasing supply because it intends to eliminate the backlog in two weeks. The backlog, or the foreign exchange that banks and enterprises should have received but haven’t, is one indicator of excess demand. As a result, they are under pressure to find foreign exchange elsewhere. Teriba stated, “The pressure goes away and the naira stabilises if the government pays the backlog.”
“This is a welcome development,” says Ayodeji Ebo, managing director/CBO of Optimus by Afrinvest, “but the strategy on how this will be achieved was not clearly stated.”
If this is carried out, he claimed, the gap between the official and black market will decrease and economic confidence will rise.
“This is a crucial matter. The removal of the 41 products on the exclusive list would be a complementary measure to return demand to the official market. For example, through their trades, Eurobond traders would add liquidity to the foreign exchange market,” he stated.
The CBN’s action, according to Muda Yusuf, CEO of the Centre for the Promotion of Private Enterprise, will contribute to reviving trust in the foreign exchange market and the economy as a whole.
He pointed out that confidence is the main obstacle facing the economy. “In order to attract money from investors, we must eliminate the backlog. It will assist in lowering speculative activity and raising confidence. It is imperative that this very important item be done. The situation will be more stable. It’s a positive development, he declared.
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If the plan comes to pass, according to Olusegun, the analyst of Polaris Bank Limited, it will cause the Naira to appreciate vs the dollar and boost investor confidence in the nation.
Since the majority of those futures were converted to spot by banks using their offshore position or trade lines, he claims that banks will also have greater space to pay down trade line liabilities or replenish their offshore positions.
At the unofficial foreign exchange (FX) market, sometimes referred to as the parallel market, the value of the naira fell to N925 per dollar on Wednesday.
This indicated a 0.87 percent devaluation over N917/$1 transacted at the same market, often known as the black market, over the previous five days.
