A Significant Reduction in FX Utilisation

Tuesday, August
31, 2021 / 1:11 PM / by FBNQuest Research / Header Image
Credit: Land-FX

We
see from CBN data that total sectoral utilisation of FX declined by -65% y/y
and -25% q/q to c.USD5.0bn. In addition to the reduction in aggregate fx
utilisation, the pandemic’s influence can be seen in changes in the composition
of sectoral forex usage. Unlike the pre-pandemic trend, when invisibles (mainly
services) dominated, goods imports accounted for c.58% (or USD2.9bn) of overall
foreign exchange usage in Q1. As seen in our chart below, the share of invisibles
which plummeted to just USD1.0bn (30% of total) in Q2 ’20 improved slightly to
USD2.9bn in Q4 ’20, and then fell to USD2.1bn (42% of total) in Q1 ’21, largely
due to seasonal factors.

Drilling
down on invisible imports, we see that forex utilisation by the financial
services sector which accounted for c.35% (or USD1.7bn) of total fx usage in
Q1, fell -84% y/y. We assume the fx usage for the sector are those related to
items such as professional services including trainings, and Information
technology amongst others.

Interestingly,
forex usage for education, and communication services bucked the trend as both
increased by c3.5x and 2.2x for the former and the latter respectively.

Industrial
goods, the largest segment within visible imports, saw its share of forex
utilisation decline to USD1.1bn from c.USD1.4bn in the comparable quarter of
2020.

Given
the difficulties with forex liquidity during the quarter, we observe that some
of the non-financial names under our coverage (mostly consumer goods companies)
continue to source a modest percentage (<10%) of their fx requirements through unofficial channel.s

Despite
the CBN’s preference for adding food products to its forex restriction list, we
observe that fx usage for foods has remained reasonably consistent at USD0.5m
on a quarterly basis. Rather than restrict foreign exchange access, the CBN
should, in our opinion, embrace policies that allow for greater exchange rate
flexibility in the near term.

In
the long run, Nigeria can seek inspiration from further ashore. Numerous case
studies of China and India suggest that either (or both) an export-driven
industrialisation plan (China) or a service-led export strategy (India) are
viable strategies for achieving exchange rate stability.

Related News

1. Naira
   Depreciated at the Parallel Market by -0.54% WoW to N518.60 from N515.80
2. Recent FX
   Pressures: Storm Before…