Nigeria’s new foreign exchange policy and its effect on global businesses
The foreign exchange plays a crucial role in Nigeria's economy due to its position as a major oil exporter and its involvement in international trade. The Central Bank of Nigeria (CBN) recently introduced a new forex policy to improve Nigerians' difficulties obtaining funds for foreign exchange transactions. The policy seeks to simultaneously address exchange rate volatility and forex scarcity, encourage transparency, improve customer confidence, and boost economic growth.
Understanding the impact of this policy is crucial for businesses across various sectors, including importers, exporters, manufacturers, and service providers. By delving into its impact, we can weigh the potential benefits, challenges, and opportunities that may arise for these different sectors.
Brief Overview of the FX Policy
The Central Bank of Nigeria has officially adopted a floating exchange rate system, relinquishing control over the FX markets. This means foreign exchange rates to the Naira will be determined by the prevailing market rate at the Investors and Exporters window (I&E) window at the time of purchase.
This policy affects both individuals and business owners, as the supply of FX for PTA, BTA, school fees, medical bills, etc., would be disbursed using the market rate at the time of purchase.
What does this mean for Businesses?
Before the new policy announcement, the CBN managed four official national rates in Nigeria. In a 2021 article, Stears provided a table that breaks down the different market windows.
The first is the CBN official rate used for all government transactions and oil revenue,
The Investors and Exporters window,
The retail secondary market intervention window and
The wholesale secondary market intervention window.
Many individuals and businesses did not fall into these categories and were forced to rely on the parallel rate. Because of the high demand for the dollar, the naira kept falling against the dollar over the years.
The new floating exchange rate system was implemented to eliminate multiple exchange rate windows. Streamlining the rates enhances transparency and eliminates distortions, promoting a more efficient forex market. The new policy also aims to increase access to forex for businesses and individuals, particularly for essential imports, strategic sectors, and critical investments.
The policy focuses on boosting domestic production and reducing import dependence. This will allow local businesses to expand operations and contribute to economic growth.
In summary, this new approach by the CBN seeks to address the challenges businesses face in obtaining forex under the previous policy, enabling smoother trade operations and encouraging investment inflows.
Sectors or Industries that may benefit from the new CBN policy
We have provided a list of some sectors or industries that may benefit from this new policy.
Export-Oriented Industries: Agriculture, manufacturing, and oil and gas.
Local Manufacturing: Domestic industries that produce goods locally, such as textiles, consumer goods, and automobiles, may experience increased demand as consumers switch to locally produced alternatives.
However, the new FX policy does not cover everyone
While the policy prioritizes specific sectors, businesses that don’t fall under the priority list may still face challenges accessing forex. This would mean a forex scarcity at the parallel market, causing an unstable exchange rate. The very thing the CBN tried to curb by creating this policy.
The CBN’s unchanged policy on the 43 non-essential imports may lead to increased prices of specific goods and services in the short term, potentially impacting consumers' purchasing power and business operations.
The risk involved
This policy also exposes business owners to some risks, such as:
Import Dependency: The new forex policy is a welcome change for exporters but may affect importers. While exporters may benefit from access to foreign currency earnings and an increase in local production and purchases, businesses heavily reliant on imports may face difficulties finding suitable local alternatives.
Foreign investors: The market volatility and uncertainties surrounding the new forex policy may affect foreign investors. Businesses heavily dependent on foreign investment may face uncertainties from their international stakeholders.
Possible hike in prices: The floating naira policy introduces uncertainty into businesses' financial and cash flow management. Increased prices for raw materials, rent, finished goods, and labour. This hike can affect financial planning, salary payments, and profitability calculations.
The Role of Technology and Innovation: How Klasha can help bridge the floating gap
Although larger corporations with established operations and access to international markets may be better equipped to navigate the uncertainties of the new forex policy, other companies may not be able to handle the uncertainties well. With temporary surges climbing at an all-time high lately, there is a need to put in place measures that can help combat this.
Embrace digital payment platforms to facilitate seamless cross-border transactions, reducing the reliance on physical cash and traditional banking channels. This is what Klasha offers. By providing seamless cross-border transactions, simplified currency conversions, and access to global markets, Klasha empowers businesses to thrive in a rapidly changing market.
With Klasha Wire, you can access the most negotiable rates in the market and a 24- to 48-hour payout time instead of the standard 7 to 21 working days timeline to over 120+ countries.
With Klasha Wire, you can sell any existing foreign liquidity (USD, GBP, and EUR) and receive African currencies (NGN, KES, and ZAR) to pay your customers out.
Although the new forex policy has several positive aspects, it is essential to note that some risks can accompany it. Businesses may face challenges accessing forex if they do not fall within the priority sectors. Klasha is perfect for merchants who need the most affordable exchange rates and want to complete cross-border transactions in 1 to 3 days.