Nigeria’s foreign exchange (forex) position remained tenuous at the weekend with continuing decline in the national currency and the country’s forex reserves.
The national forex reserves have lost about $430 million in successive decline in the past three weeks, dropping to $38.49 billion.
Naira depreciated across the official and parallel markets as the Central Bank of Nigeria (CBN) struggled to sustain its managed forex rate system.
At the official Investors and Exporters (I & E) Window, the naira depreciated to N436.33 per dollar at the weekend compared with N436.25 per dollar recorded in the previous week. At the parallel market, the naira depreciated by 0.4 per cent to N712.00 per dollar. This implies a gap of N275.75 or 63.21 per cent between the official rate and the parallel market.
Data from Hanke’s Currency Watch List ranked naira as the 11th worst-performing currency against the dollar in the list of 19 worst-performing currencies in the world. Naira also ranked the fourth worst in Africa.
Amidst dwindling global oil prices and national incomes, Nigeria’s forex reserves have been on the downtrend in the past three weeks to close at $38.49 billion as at September 22.
Total turnover at the I & E Window had risen by 1.9 per cent to $421.81 million by September 22,2022, with trades consummated within N425.00 and N453.03 per dollar band.
Naira also weakened across the various forwards contracts with the one-month, three-month, six-month and one-year contracts dropping by 0.8 per cent, 0.9 per cent, 1.1 per cent and 1.7 per cent to N439.24 per dollar, N444.21 per dollar, N457.57 per dollar and N484.03 per dollar.
Analysts said the widening gap between the official and parallel rates would further discourage independent forex owners from the official market, after the apex bank’s incentive regime failed to woo independent sources to the official market.
Analysts have attributed the currency depreciation and widening gap to the multiple forex rate management of the CBN, describing as unsustainable.
Analysts at Cordros Capital said although the apex bank might have enough liquidity to support the forex market over the short term, it needs significant independent foreign inflows to sustain forex liquidity over the medium term.
According to analysts, considering the tepid accretion to the reserves given the low crude oil production level and elevated petrol under-recovery costs, foreign portfolio investments that historically supported supply levels in the I & E Window will be needed to sustain forex liquidity levels in the medium to long term.
“Hence, we think further adjustments in the naira-dollar peg closer to its fair value and flexibility in the exchange rate would significantly attract foreign inflows back to the market,” Cordros Capital stated at the weekend.
Bismarck Rewane’s Financial Derivatives Company (FDC) in its economic review stated that forex demand pressures will persist; an opinion shared by most analysts.
“We expect a further decline in external reserve due to central bank’s intervention in the forex market, and continuous shortfalls in government revenue relative to expenditure. Therefore, the ability of the central bank to stabilize the currency is likely to be weakened,” FDC stated.
According to analysts, forex liquidity remains squeezed and as such the official exchange rate of the naira may be devalued by about five per cent while the parallel market rate may hover between N675 per dollar and N690 per dollar.
“Headline inflation is expected to remain elevated due to the persistent currency pressures in the system. Inflation will further soar in August before moderating in September. Nigeria’s oil production will remain subdued in August as the lingering issues of pipeline vandalism, oil theft and operational challenges continue. Therefore, oil revenue is expected to remain below the budget,” FDC stated.
Data from Hanke’s Currency Watch List ranked naira as the 11th worst-performing currency against the dollar in the list of 19 worst-performing currencies in the world. Naira ranked the fourth worst in Africa, ahead of the Ghana Cedi which ranked 13th globally and third in Africa; according to the latest edition of Unity Bank Digest released at the weekend.
The data further revealed that the naira has lost 48.87 per cent of its value against the dollar as at September2, 2022 compared to its value in January 2020.
According to the report; the naira’s woe was due to falling external reserves and limited forex supply relative to the demand for forex. This has been worsened by the current fall in oil prices below $90 per barrel amid low oil production levels, which limits the inflow of forex through oil exports.
The report noted that severe currency depreciation is one of the major inflation-stoking factors pointing out that Nigeria’s inflation had spiked to a high of 20.52 per cent in August and could stay elevated in September on the back of currency pressures and soaring energy prices before falling in September.
“Nigeria remains heavily import dependent and is currently facing a dollar crunch. This means that the cost of importing products into the country will rise, triggering further inflationary pressures. Meanwhile, the existence of multiple exchange rates in the country has contributed to the fast slide of the naira and left investors spooked, slowing the inflow of foreign capital into the country. A decline in investment is negative for the growth of the economy,” the report stated. (The Nation)
