NESG: CBN’s adoption of NAFEX may stem capital outflows

The Central Bank of Nigeria (CBN)’s recent adoption of the Investors and Exporters’ (I&E) window-NAFEXrate as the official exchange rate, as well as the “rising  interest rate environment” could reduce the rate of capital outflows from the country, the Nigerian Economic Summit Group (NESG) has said.


The group, which stated this in its “Q1’21 Economic Report” obtained by New Telegraph yesterday suggested the need for what it described as “investmentfriendly forex management to improve investors’ confidence in the Nigerian economy.”


Citing National Bureau of Statistics’ (NBS) report, which shows that foreign investment inflows plunged by 59.7 per cent to $9.7 billion in 2020, occasioned by a sharp drop in foreign portfolio investments, which accounted for 53 per cent of total investment inflows in 2020, the NESG stated: “The CBN’s adoption of the NAFEX or IEFX exchange rate in May 2021 and the rising interest rate environment could reduce the rate of capital outflows, going forward.”


It stressed that although “widening trade deficits amidst the investors’ risk aversion and weak oil export earnings could mean that external reserves would continue to deplete,” the regulator should not resort to forex rationing – “which was the CBN’s practice in most parts of 2020” – given that this “would somewhat impair the confidence of foreign investors in Nigeria’s financial markets; while they adopt a flight to safety approach due to negative real return on investment and uncertainty around their forex repatriation.”


Recommending that “the apex bank should rather be an independent trader in the forex market than being the main influencer,” the NESG said the CBN’s adoption of NAFEX or IEFX exchange rate “reflects the forces of demand and supply of forex amongst investors and exporters (and) this development is more likely to arouse investors’ interest in the Nigerian economy, going forward.”


As part of measures to achieve exchange rate unification, the apex bank had on May 14 removed the former official exchange rate of N379/$1 from its website and a few days later, adopted the I&E window or NAFEXrate, which then stood at N410.25/$1, as the official exchange rate.


CBN had introduced the I&E window in 2017 to improve foreign exchange market mechanisms, deepen market liquidity and ensure prompt execution and settlement of all FX transactions.


Meanwhile, one of NESG’s key policy recommendations is that apart from striving for an economic rebound, Nigeria needs to improve growth inclusiveness. As the Group put it, “Nigeria has struggled to achieve inclusive growth for many decades.


Since recovery from the 2016 recession, the economy has been on a fragile growth path until it slipped into another recession in 2020 due to COVID-19.


“This suggests that the country needs to attain high and sustainable economic growth to become strong and resilient. The relationship between economic growth and unemployment rate in Nigeria suggests that economic growth has not led to a reduction in unemployment rate – jobless growth.


“To reverse this recurring trend, there is an urgent need for collaborative efforts between the government and relevant stakeholders towards addressing the constraints to value chain development in high growth and employment-elastic sectors, including: manufacturing, construction, trade, education, health and professional services, with ICT and renewable energy sectors as growth enablers.”




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