Data from the Central Bank of Nigeria reveals Nigeria utilized $4.98 billion on the import of goods and services into the country in the first quarter of 2021. This compares to $14.3 billion utilized in the first quarter of 2020 representing a 65% drop.
This is the lowest utilization of forex in Nigeria since 2017, the last time Nigeria faced similar forex challenges.
Nigeria is experiencing a currency crisis that was triggered by a drop in oil prices and the covid-19 pandemic which forced it into an economic lockdown. Lack of foreign currency inflows, pent-up demand for forex, and currency controls have resulted in a depreciation of the exchange rate at the official I&E window and the black market.
Nigeria’s forex utilization is divided into Visible and Invisible Imports where the former represents the import of physical goods and the latter, services. A breakdown of the number reveals visible imports were $2.8 billion compared to $3.4 billion in the corresponding period of 2020. Visible imports include imports for Industrial Sector, Food Products, Manufactured Products, Agricultural Products, etc. Industrial, Food and Manufactured products hold a lion’s share of imports.
The amount utilized for invisible imports however fell to $2.1 billion in the first quarter of 2021 compared to $10.97 billion in the corresponding quarter. Imports from the financial services sector typically took the largest chunk of invisible import, as high as 94%. In 2020, the country utilized $10.5 billion for financial service imports, compared to $1.7 billion in the first quarter of 2021, representing an 83% drop year on year.
Forex utilization data is a useful proxy of how much forex is being allocated for use by the CBN to the private sector. In 2014 when oil prices were above $100 per barrel forex utilization was as high as $18 billion in the first quarter of the year.
The drop in the level of forex utilization this year confirms the difficulty currently faced by local businesses in accessing forex. To meet the demand for forex, most private businesses resort to the black market where the exchange rate operates at a higher depreciation rate compared to the official market. The pent-up demand inadvertently creates a burgeoning market for BDC and parallel market operators going as far as attracting forex from businesses who actually import forex into the country.
Nigeria currently operates multiple exchange rate regimes but since this year, has relied on the exchange rate at the official Investor and Exporter (NAFEX) window to determine the prevailing exchange rate.