In a recent announcement, the Central Bank of Nigeria (CBN) revealed that the foreign exchange (Forex) restrictions previously imposed on a range of products, including cement, rice, and tomatoes, have played a role in the recent increase in the parallel market’s dollar exchange rate.
The CBN stated that these restrictions, designed to reduce the demand for Forex within the official market, have inadvertently led to heightened demand for Forex within the parallel market.
CBN lifts forex restrictions
The primary objective of these restrictions was to support domestic production across 43 specific products, with the aim of enhancing employment opportunities and preserving foreign reserves.
According to the CBN, these restrictions compelled importers to turn to the parallel market, thereby contributing to a surplus demand for Forex, which, in turn, has weakened the exchange rate within the parallel market and subsequently driven up prices.
The Forex restrictions have had inflationary consequences, leading to price hikes for the affected goods.
As a result, the CBN has decided to eliminate these restrictions in order to achieve a unified Forex market characterized by flexible and transparent pricing.
The central bank’s objective is to instill greater orderliness and professional conduct among all participants within the Nigerian Foreign Exchange Market.
By allowing market forces to determine exchange rates based on a “Willing Buyer – Willing Seller” principle, the CBN aims to promote price stability and bolster liquidity in the Nigerian Foreign Exchange Market, with expectations that distortions will diminish over time.
Removing the Forex restrictions is anticipated to have several implications.
Most notably, it will pave the way for a unified and well-functioning Forex market, where pricing is driven by the dynamics of supply and demand, facilitating the effective use of monetary policy tools to achieve the CBN’s core functions and mandates.
The adoption of a “willing-buyer and willing-seller” system allows for exchange rates to naturally adjust to market conditions, ensuring constant supply.
In contrast, the widening gap between the official rate and the parallel market rate had signaled an absence of a clearing price in recent months.
Importers of the restricted products had been compelled to resort to the parallel market for sourcing Forex to facilitate their imports, resulting in additional pressure on the parallel market and a persistent segmentation between official and parallel market rates.
By lifting these restrictions, the CBN will enable producers to access more affordable imported inputs, which will subsequently translate into cost savings for consumers on retail products.
Among the anticipated benefits of these measures are improvements in employment, with closed factories expected to reopen, ultimately leading to increased price stability, economic enhancement, and improvements in the standard of living across Nigeria.