The value of Naira at the parallel market has been in a free fall while at the interbank rate, Naira had been devalued by 22% since the oil crisis. This is as a result of the reduction in Foreign reserve due to oil price volatility. The Central bank of Nigeria denied importers of 41 items like Rice, Fish, palm oil which the CBN said it can be produced in Nigeria.
The issue is that CBN as a result of the shortfall in dollar supply due to reduction in oil price said Foreign Exchange wouldn't be available(interbank market) for importers of about 41 items. The implication is that traders of these items can buy dollar elsewhere maybe at the parallel market instead of the official interbank rate.
The foreign Exchange market is controlled by demand and supply. As at June 2014, the foreign reserve was at $37b while the price of crude oil(Nigeria's major export commodity) was at $144 per barrel. By March 2015 when the price of crude oil reduced to $48 per barrel, the reserve had reduced to $30b. The implication of this is that, The Central bank is short of foreign exchange to pay for foreign exchange related transaction. It means the demand for dollar(the official foreign exchange currency) outstripped the supply of dollar. The option left for CBN is to use its regulatory power to reduce the demand for dollar.
Let look at those things that CBN needs dollar to settle..petroleum import bills, Rice, Textile, school fees and medical bills. CBN delisted 41 items that can be produced locally in order to meet up with the interbank foreign exchange demand.
There was protest by small businesses and importers but in reality, what is the implication of CBN policy on Micro, Small and medium enterprises(MSMEs)?
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Micro, Small and Medium Enterprises comprises of both traders(meaning importers) and manufacturers. Why do traders travel to China to import goods? In China, goods can be produced at very low price because of the level of industrialization. In return, the importers can sell at a cheaper rate and make lot of profit in Nigeria. However, the Central Bank foreign exchange policy implies that most of them can't obtain dollar for importation except from parallel market.
Micro, Small and Medium Enterprises comprises of both traders(meaning importers) and manufacturers. Why do traders travel to China to import goods? In China, goods can be produced at very low price because of the level of industrialization. In return, the importers can sell at a cheaper rate and make lot of profit in Nigeria. However, the Central Bank foreign exchange policy implies that most of them can't obtain dollar for importation except from parallel market.
The Nigeria MSMEs are the real winners: those that are in the real sector(manufacturing) and agriculture. However, some of them might need foreign exchange to buy raw material needed for production.
The implication is that traders that are importing items that can be produced locally are advised to think inward and set up local production plant. It might be painful in the short run, but definitely, the economy as a whole will benefit in the long run let say 3 years from now
Federal government must make more effort in diversifying the economy. In the short run, boost the capacity of the SMEs and bridge the shortfall. The reality is that there is no reserve to meet all foreign exchange demands and in the next few years, the naira will keep struggling against the dollar. Government must also make effort to meet all foreign exchange demand for inputs and equipment.
