Exchange rates in Nigeria’s foreign currency markets deteriorated on Tuesday due to the country’s persistent lack of US dollars. As a result, the difference between the parallel and official markets has narrowed to N145, fueling increasing speculative activity.
The government’s naira reform has failed to achieve the projected convergence due to weak foreign currency inflows into Nigeria. Most analysts believe that foreign investors would stay away since the Central Bank of Nigeria (CBN) has been unable to clear the FX backlog despite hefty FX obligations on the country’s external reserves.
Critics say the decision to float the naira in June was politically driven, and the change should never have been implemented in the first place. Nigerians feel that depreciation of the native currency provides no meaningful benefit to a country that must rely on foreign inputs for consumption and subsequent production.
Arbitrageurs the Naira had inched close convergence earlier and was cheaper at moments in the official market than in the parallel market, sending a negative signal to speculators.
The reversal of historical rate disparity began when post-reform management directed FX requests to the parallel market as a result of a weak supply side.
Analysts believe that Africa’s largest economy must have enough buffer to support the local currency from free falling as the local debt agency maintains distance from the Eurobond market for borrowings.
However, local borrowings have been attracting negative interest yields that locked the door against foreign investors’ participation. The recent attempt by the CBN to resume OMO bill sales was however adjudge right step for attracting foreign receipts since revenue from oil exports continues to underperform.
Currently, Nigeria lacks a comparative advantage in home production and this has continued to boost demand for foreign products for consumption. Demand for business and personal travelling allowances continued to rise while remittance through official channels fell.
At the investors and exporters window on Tuesday, the naira depreciated against the US dollar to N775.34, losing 0.42 per cent compared to the N772.12 it exchanged for the dollar on Monday. Naira Steadies as Banks Issue Update on FX Purchase
According to market data from FMDQ, the open indicative rate closed at N769.66 to the dollar on Tuesday. Traders said a spot exchange rate of N799.90 to the US dollar was the highest rate recorded within the day’s trading before it settled at N775.34.
The naira sold for as low as N701 to the dollar within the day’s trading. Market analysts said a total of 71.32 million dollars was traded at the investors and exporters window on Tuesday.
In the parallel market, the local currency depreciated by 0.27% to N920 after the CBN brought private currency traders back into the fold. However, the apex bank said it has no plan to sell US dollars to Bureau De Change operators but capped FX spread on their dollar sales to invincible users.
In the oil market, Brent crude rose 0.26% to $84.64 per barrel, while West Texas Instrument (WTI) crude gained 0.29% to $80.33 per barrel. Oil futures were higher as traders balanced supply constraints arising from Hurricane Idalia’s potential impact on the US golf against growing demand concerns as rate hikes.
