CBN’s Order To Banks To Sell 60% of Forex To Manufacturers Could Backfire…
The Central Bank of Nigeria has instructed commercial banks to sell about 60% of their forex to the Manufacturing sector. The Bank gave this instruction via a circular dated August 22, 2016. The CBN did not explain how it arrived at the figure of 60%.
According to the CBN, it gave this instruction because it observed that “a negligible portion of foreign exchange sales are being channeled towards importation of raw materials for the manufacturing sector.”
This, according to the CBN, created an “imbalance” which it hoped to address by authorizing dealers to sell “60% of their forex purchases from all sources to the “manufacturing sector end users for the importation of raw materials and plant and machinery.”
The CBN agreed to float the Naira in June 2016 paving the way for what most people thought will be a free market for the trade of forex. Unfortunately, scarcity remains sky-high widening the disparity between the inter-bank and black market rates.
Will it backfire?
Despite the good intentions of the CBN, this directive could be seen as another show of high-handed regulation meant to disrupt free market activities. Critics believe that in a market that is truly free, banks need not be “forced” to sell any percentage of the forex purchases to Manufacturers or indeed any group, as supply will naturally go to where supply is needed at the right price.
This directive could also worsen an already existing price disparity between the official and parallel market rate especially as the demand for the 40% far outweighs that of the Manufacturing sector.
The Central Bank has, over the last one year, tried without success to control the demand for forex. From restricting dollar withdrawals on card transactions to banning of 41 imported items from the forex market, to banning of sale of forex to BDC’s, the CBN has failed to save the Naira. Rather, every move has resulted in a wider disparity between the official and the parallel market rate.
The Manufacturing sector of the economy has groaned for months about their lack of access to forex. The Manufacturing sector makes up about 55% of Nigeria’s GDP and relies on imports of raw materials, plant and machinery to produce.
See the circular below;