The Central Bank of Nigeria (CBN) announced additional capital controls on June 24. CBN Governor Godwin Emefiele listed up to 40 items that would henceforth not be eligible for the purpose of purchasing foreign exchange on the interbank market. These items comprise food-related products, manufacturing inputs, textiles & clothes, certain household goods and cement. The additional restrictions also include impediments to financial account items, such as the accumulation of portfolio assets abroad (Eurobonds, foreign currency bonds & share purchases).
Importers of these products will thus need to turn to the parallel foreign exchange market to gain access to forex. The CBN hopes its decision will ease some of the pressure on the country’s foreign reserves. In justifying the additional forex restrictions, Mr Emefiele stated: “Sometimes, policy changes are forced on policymakers as a result of exogenous shocks beyond their control. While most people do not like to be forced to do something, one of the hallmarks of effective policymaking is to be nimble and responsive when such situations arise.”
The governor also again highlighted his preference that the role of the central bank should include a particular focus on developing the economy: “In the case of yesterday’s announcement, I am happy to inform and underscore that this policy change is in line with my long-held belief that Nigeria cannot attain its true potential by simply importing everything.”
While forex liquidity will remain tight over the coming months – in light of JPMorgan’s move to delay a decision on Nigeria’s inclusion in its government bond index – the introduction of additional capital controls suggests that the monetary regulator is especially reluctant to devalue the naira. This begs the question: at what cost?
The CBN is of the opinion that capital controls on the listed products will encourage domestic production of these items, which would in turn support stronger economic growth and employment creation. However, goods are imported either due to domestic supply shortages or due to domestic supply inefficiencies – in the latter case, imported goods are often more cost-effective seeing as the trading partner has a competitive advantage in the manufacture of a specific product, be it cheaper raw materials, more productive labour or a more favourable climate for instance.
Furthermore, the re-alignment of supply chains and domestic suppliers ramping up production will take time and the business environment would need to improve to avoid adversely impacting competitiveness. In the interim, imports paid for by forex purchased on the parallel market will be significantly more expensive with adverse implications for inflation. The additional forex restrictions could also see the gap between the official and parallel foreign exchange markets widen further.
While the capital controls should in theory serve to reduce the pressure on foreign reserve holdings – a devaluation or a more flexible exchange rate arrangement would have had a similar effect – the degree to which this will be the case needs to be questioned when noting that oil & gas accounted for an estimated 24% of total imports in 2014, and efficiency improvements at Nigeria’s refineries could have had a more significant impact without the prospect of disrupting local business and souring investor sentiment even further.
Elsewhere, the governor of the Banco Nacional de Angola (BNA) told Reuters on June 22 that the monetary regulator was considering the implementation of “measures to mitigate US dollar shortages”. The governor also stated that businesses would need to “adjust their foreign exchange needs” in order to reduce the demand for US dollars. The BNA opted to ‘devalue’ the kwanza exchange rate on June 5. However, as expected, the local unit has again come under pressure and breached the Kz120/$ level on June 25.
The exact details in relation to what measures the governor is referring to remain unclear. On the positive side, capital controls should slow the rate of depreciation and ease some of the pressure on foreign reserve holdings. This will in turn hold positive implications for inflation and the monetary policy stance. However, this could push the kwanza deeper into overvaluation territory, which will be detrimental to exports and capital markets more generally.
In addition, capital controls will hurt businesses that rely on imported materials or products and will sour investor sentiment in general. The decision on whether to adopt controls ultimately hinges on factors such as the type of forex restrictions that are implemented, the size of the parallel market, the effectiveness of monetary policy, the degree to which the country’s consumers are import dependent and whether the economy is demand or supply driven.
In general, while capital controls could see consumers breathe a sigh of relief over the short term, the medium-term implications could well include business closures and job losses. Without more details on the type of forex restrictions that are being considered, an analysis on the merits and disadvantages thereof is unfortunately not possible. Nonetheless, the central bank’s actions in this regard needs to be monitored closely moving forward.
Cobus de Hart (Economist)