Yemi Kale, Partner & Chief Economist at KPMG Nigeria, highlights the appointment of cabinet members to lead sector reforms as a significant factor to watch in the second half of the year. He also identifies other key factors including the management of foreign exchange (FX) reforms by the Central Bank of Nigeria (CBN), the operational start of the Dangote refinery, efforts to address oil theft and boost oil production in the short term, and the government’s fiscal and trade agenda.
Speaking at the BusinessDay CEO Forum, Kale emphasizes that attracting FX inflows will remain a major policy goal in the latter half of 2023. Weak inflows have contributed to the continuous decline in Nigeria’s external reserves, which have lost 8.2% of their value year-to-date due to high demand for foreign currency and insufficient inflows.
However, there has been an increase in total inflows into the importers and exporters (I&E) forex window, reaching $1.41 billion in June 2023, following the unification of exchange rates. This represents a significant 23.8% month-on-month increase compared to the $1.14 billion recorded in May, according to data from the FMDQ.
Kale acknowledges that the removal of the exchange rate peg has led to a convergence of official and parallel market rates. However, limited inflows have caused the depreciation of the Naira against major currencies, and autonomous FX flows serve as the primary sources of FX inflows in Nigeria. Empirically, a 1% increase in the foreign exchange gap results in a 0.4% reduction in autonomous flows.
The Naira depreciated further, falling by 1.21% against the dollar to an average rate of N821 at the parallel market due to increased demand for dollars by summer holiday seekers. However, at the Investors and Exporters (I&E) forex window, the Naira appreciated by 4.82%, with the dollar quoted at N746.28 on Thursday.
Kale believes that the Naira is fundamentally undervalued in the official market at current levels and suggests that external reserves may continue to decline without substantial multilateral support or external fundraising, considering the FX backlog and Eurobond redemptions. Key challenges affecting investment inflows include infrastructure issues, insecurity, FX policies/scarcity, and uncertain policies. He suggests that raising interest rates in the short term to attract portfolio investments and address the downward trend of reserves may be necessary, while long-term solutions require addressing structural problems to encourage foreign direct investment (FDI) and improve export earnings.
Regarding financial markets, Kale anticipates a moderation in the rally, noting that recent reforms of FX and petrol subsidies have received positive responses from the markets. The NGX Market Capitalization has witnessed an increase from N28.85 trillion on May 26 to N34.3 trillion on July.
