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World Bank: Nigeria’s economic recovery needs stronger forex action

The Central Bank of Nigeria (CBN) should step up efforts to ease pressure on the foreign-exchange market to meet growing demand for hard currency in the country, the World Bank has said. World Bank Country Director for Nigeria, Shubham Chaudhuri, was reported by Bloomberg yesterday as saying that while the Bretton Woods institution welcomes resumption of dollar sales after a five-month break, “continued and even stronger action and a clear commitment from the central bank will go a long way toward facilitating a stronger recovery. ”

 

Nigeria suffered a 6.10 per cent contraction in Gross Domestic Product (GDP) in Q2’ 2020 and the economy is
expected to slip into a second recession in four years by the end of 2020. The country has been hard hit by a severe shortage of dollars after the CBN halted its weekly interbank foreigncurrency sales as well as sales to Bureaux De Change (BDC) in March. The outbreak of the coronavirus and subsequent lockdown of major economies led to the slump in the price of crude oil, which accounts for more than 90per cent of the nation’s foreignexchange earnings.

 

Following the resumption of international flights, the CBN resumed the sale of dollars to BDCs as well as authorized dealers, such as lenders and forex dealers like Travelex on September 7.

 

Although the apex bank’s announcement that it would resume forex sales to BDCs led to the naira, which has been under pressure on the parallel market since the beginning of the year, rebounding from N477 per dollar to N440/$1 penultimate Tuesday, the local currency had dropped to N455 per dollar by yesterday.

 

Forex dealers attributed the naira’s weakening to speculation that the CBN may not be able to sustain its interventions in the forex market especially as oil prices are not showing any sign of rising beyond the $45 per barrel mark. Indeed, businesses and importers have complained that the CBN’s measures to defend the naira and preserve foreign reserves have hurt their operations and capacity to repay dollar debt.

Notably, Bloomberg cited the Financial Times report on Thursday that power plant Azura, partly financed by the private-lending arm of the World Bank, could default on its dollar-denominated debt because of the dollar scarcity.

 

“The Azura case is just one example of the difficulties that a number of established foreign and domestic private firms in Nigeria have had in accessing the forex to meet their business and contractual obligations,” Chaudhuri was quoted as saying by the news agency. There are speculations that the World Bank is delaying approval for a much-needed $1.5 billion loan sought by Nigeria due to concerns over reforms.

 

Specifically, the view in some quarters is that the World Bank did not approve the loan in August, as had been widely anticipated, because Nigeria was yet to comply with key reform requirements, including exchange rate unification.

 

Analysts believe that the CBN has not implemented complete exchange rate unification as it is trying to avoid another devaluation of the naira.

 

The apex bank has instead focused on introducing measures that would help preserve its forex reserves, such as banning the use of agents in import transactions and calling out exporters that don’t repatriate proceeds.

 

On Thursday, President Muhammadu Buhari ordered the CBN to stop providing foreign exchange for food and fertilizer imports.

 

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