Home Latest Insights | News As Naira Falls, What Next for Nigeria?

As Naira Falls, What Next for Nigeria?

As Naira Falls, What Next for Nigeria?
Naira

Nigeria’s foreign reserves have dropped to $38.59 billion as the Central Bank of Nigeria (CBN) continued its currency float management that had seen the apex bank pumping $3.36 billion into the foreign exchange (forex) market over a two-month period.

The apex bank’s January monthly report on ‘Foreign Exchange Market Developments’ showed that $1.71 billion and $1.65 billion were injected in December 2021 and January 2022, respectively.

Latest figures from the mother bank indicated that the forex reserves depreciated $125.53 million to close, over the weekend, at $38.63 billion.

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The latest decline in the foreign reserves could be attributed to the continuous intervention by the CBN in the forex market in order to ensure the stability of the local currency.

In spite of the interventions, the Naira has continued to depreciate closing, as at penultimate week, at N610 per Dollar at the parallel market, a decline of 0.7 per cent. At the official Investors and Exporters (I & E) Window, the naira fell by 0.1 per cent to N419.50 per dollar.

It’s noteworthy the naira had previously made marginal gains after the Monetary Policy Committee (MPC) raised interest rate by 150 basis points.

The local currency appreciated from N610/$ to N605/$, representing N5 gain after the MPC hiked Monetary Policy Rate (MPR) from 11.5 per cent to 13 per cent per annum.

The naira is, however, still trading weaker than pre MPC close of N600/$ at the parallel market but remains stable at N415.72/$ at the official market.

Forex Trader, AZA Finance, Ikenga Kalu said, “We expect the naira to appreciate further in the coming days back to N600/$. However, strains are likely to persist over the medium term given ongoing dollar supply constraints.”

The CBN said its policies – naira-for-dollar – incentives, stoppage of dollar sales to Bureaux De Change (BDC) and restriction of forex sales to 43 items that could be produced locally are meant to boost dollar liquidity and create currency convergence.

The CBN Governor, Godwin Emefiele explained that Nigeria, like other emerging market countries, reliant on oil exports, saying the retreat by foreign portfolio investors significantly affected the supply of foreign exchange.

“With the decline in our foreign exchange earnings and successive exchange rate adjustments, the CBN has continued to implement a demand management framework, which is designed to bolster the production of items that can be produced in Nigeria, and aid conservation of our external reserves.”

Emefiele further disclosed that the CBN had continued to favour a gradual liberalization of the foreign exchange market in order to smoothen exchange rate volatility and mitigate the impact which rapid changes in the exchange rate could have on key macroeconomic variables.

On his part, an economist and Managing Director of Financial Derivatives Company Limited, Bismarck Rewane, explained that CBN’s efforts at naira convergence would help reduce the official-parallel market spread which would in turn decrease the incidence of speculative trading at the parallel market.

“A reduced spread would decrease the incentive (arbitrage) for speculators to obtain forex at the official market and resell at the parallel market. This may result in panic dumping of dollars at the parallel market due to the concern of lower demand for forex and appreciation of the dollar at the parallel market.”

Rewane advised that closing the gap between the official and parallel market rates was likely to reduce the demand for forex at the parallel market, pushing investors and traders to the official market. This would lead to increased forex transactions at the official market.

He explained that the wide official-parallel market spread and the low forex supply at the official market had been the main factors driving investors and traders to source forex at an expensive rate from the parallel market.

For him, reducing this spread, coupled with an improved forex supply at the official market, would decrease uncertainty (volatility) at the forex market and bolster the ability of the official window to meet a higher demand for dollars.

The resulting impact of this is that a reduced exchange rate volatility and improved forex supply would make it easier for foreign investors to repatriate their funds.

It would equally ensure that traders and manufacturers access forex at a uniform rate from both the official and parallel markets.

“Reduced naira volatility and improved forex supply are positive for foreign direct investments and foreign portfolio investments as well as the country’s external trade. This is because of the increase in the volume of dollars available for foreign trade and investment.” he opined.

One might wonder why the BDC is still relevant, recognized and seemingly powerful in Nigeria’s money market, despite several calls for its eradication. The lingering occurrence of such uncalled and illicit practice has over the years made the country’s forex market look laughable and pitiable, at the expense of her economy.

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