Nigeria’s forex ban on sugar, wheat may drive up inflation: Capital Economics

The Central Bank of Nigeria’s ban on the use of foreign exchange for the importation of sugar and wheat could result in higher inflation, a London-based economic research company, Capital Economics, said on Friday.

“The latest decision by the Central Bank of Nigeria to restrict the use of foreign currency for certain imports is likely to inflict real economic damage,” its Emerging Markets Economist, Virag Forizs, said in a note.

Late last week, the CBN added sugar and wheat to a list of 40+ products for which no foreign currency will be provided for import purposes.

Forizs said, “The stated aim of these measures is to boost local output but it is clearly an effort to ease pressure on the currency. The naira is about 21% weaker on the black market compared to the official exchange rate.

“Local sugar and wheat production capacity is far from sufficient to meet demand. So the ban could result in higher inflation as traders source FX from the parallel market and/or push higher costs onto customers.”

The company said the economic costs of maintaining a fragmented exchange rate regime with an overvalued currency would rise further.

“Eventually, we think that the CBN will let the naira weaken by about 10 percent, to 425/$, by end-2021. But a sharper adjustment will still be needed further ahead,” it added.

Forizs noted that the CBN Governor Godwin Emefiele appeared to stand firm in backing central bank financing of the government, portraying such support as an emergency measure.

“However, this was a problem well before the pandemic. Nigeria’s Finance Minister Zainab Ahmed commented this week that ‘we will make sure that we don’t have to do that’ when asked about deficit monetisation,” he said.

According to Capital Economics, Ahmed may prove to be right, at least this year, as higher oil prices and low capital expenditure are likely to narrow the budget deficit to a level that can be financed via sources such as recently-secured concessional loans.

“But we think the government will resort to deficit monetisation again in 2022-23,” it added.