Citigroup urges CBN to lift forex embargo on 43 items

Citigroup has said that the restrictions placed on foreign exchange provisions for 43 items by the Central Bank of Nigeria must go if the country is to fix challenges plaguing the forex market.

This was revealed in the CEEMEA Frontier Credit Market Commentary written by credit analyst, Ayso van Eysinga, following a trip to Nigeria.

In his notes, Van Eysinga said that apart from clearing the backlog of forex demand, there was a need to remove restrictions from the 43 items.

He said, “The ‘backlog,’ much was made of the CBN’s net-reserve estimates – but the focus for the ‘new’ CBN is the past-due forwards (~US$6.8bn). These are due to local banks, who took the forwards on from local corporates, and re-paid credit-lines with their own funds when the CBN did not pay out. This is the most pressing need corporates cannot get new letters of credit, and banks are owed dollars. The question is: does the Central Bank need to find US$6.8bn of fresh dollars? We’d argue probably not – considering it is all in ‘the family’, a partial repayment and subsequent ‘restructuring’ of the balance would probably be ok.”

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“Clearing out the ‘backlog’ needs to be paired with a more refined FX market – as the Central Bank governor put it: an ‘elegant’ one. There are all kinds of regulations that need to be removed to get rid of the tiered FX system: the glaring one is the restriction of FX provision for 43 items.”

In a circular in June 2015 the CBN published a list of imported goods and services that will not be eligible for foreign exchange in the Nigerian foreign currency market.

The list which was originally 41 was updated to include two more items.

On the issue of oil production, the report said, “Everyone agrees, increasing oil production is the silver-bullet. But everyone also agrees that it is tough to see this materialise in the short run. The scale of the theft (100s of thousands of barrels per day) implies great organisation, and high-level contacts. Tough to break that, considering the pay-out.”

Commenting on the report, the Managing Director of Arthur Steven Asset Management Limited, Tunde Amolegbe, said, “The part of it that gives me cause for concern is the prediction that the government might find it difficult to raise crude oil production beyond 1.5m bpd in the medium term due to powerful unseen forces. The government will need to find a way to overcome these forces and aim to ramp up production above 2m bpd in order for us to see a stronger Naira and some level of price stability.”

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“Another issue of concern is the inability of monetary tightening to impact inflation due to excessive liquidity within the system. It’s clear the government will need to take some drastic action to reduce systemic liquidity so that we can see a correlation between policy and expected impact. Some critical out-of-box thinking will be required to tackle this issue.”

On the wider economic spectrum, the commentary expressed optimism that the trio of President Bola Tinubu, Minister of Finance and coordinating minister of the economy, Wale Edun and Cardoso can pull the country out of hard times and undo the misdeeds of the past administration.

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“In our meetings, we were continuously reminded that Nigeria has never had such a strong team between the Finance Minister, Wale Edun, the Central Bank Governor, Yemi Cardoso, and the President. The triumvirates have all worked together in the past, and all have orthodox/private sector backgrounds. That bodes well – reflected in support from the private sector, bilateral and multilaterals.

“That said, the problems are deep in the Nigerian economy. The triumvirate needs to unwind the deeply confused policy implemented under the Buhari (Emefiele) administration. That policy leaves the FX position encumbered: on both oil-revenues (through pre-export financing) and reserves (through past-due forwards). More (through pre-export financing) and reserves (through past-due forwards). More structurally: they need to rebuild credibility and improve the ‘rules of the game.’”

“As we started the note, the team seems the best possible for the job. The next year will be crucial,” the note concluded.


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