Naira, which was exchanged at N446.33 on Friday, November 25, 2022, has breached yet another red line as the naira battles against stronger trading pairings such as the US dollar, the British pound sterling, the Euro, and others. The Nigerian economy faced a double whammy as the local currency’s value fell in the foreign exchange market for investors and exporters, while foreign reserves fell to $37.18 billion.
Hot money from foreign investors’ buckets has been curtailed in Nigeria as the Central Bank of Nigeria (CBN) enforces capital control procedures that limit portfolio holders’ ability to repatriate foreign currency overseas. When the naira falls in value, international products and services become more expensive to Nigerian customers, driving imports to fall. According to analysts, this has a favorable impact on a productive economy.
For Nigeria, this has not been the case given structural deficiencies, according to analysts amidst a loud cry for an official devaluation of the local currency. Nigeria has close to zero comparative production advantage across key sectors including extractive, translating to low foreign currency receipts. Despite this, the country depends heavily on foreign goods and services – creating disequilibrium between the demand and supply of foreign currency.
“There is no future for Nigerian naira without structural reforms that trigger foreign currencies inflow into the economy and reduce import bills”, MarketForces Africa gathered from economists that prefer not to be mentioned.
The exchange rate at the investors’ and exporters’ FX window touched N446 again due to continued demand for dollars; it fell 66 kobo from N445.67 at the start of the week. On Friday, the naira was valued at NGN446.33 per US dollar, according to FMDQ Exchange statistics.
The monetary authority’s effort to rescue the soul of the Nigerian naira has been difficult due to inadequate fiscal performance, a result of a lack of strategic measures to boost dollar revenues.
The future for the local currency remains dismal, according to market opinion, with a prolonged reduction in external buffer and low foreign currency revenues amid structurally growing import expenses. Nigerian foreign reserves are now sufficient to cover the country for 9 months.
According to data from the Central Bank of Nigeria (CBN), total foreign reserves fell by $10.97 million last week to $37.18 billion, the lowest level since September 30, 2021, when it was at $36.78 billion.
Following the monetary policy authority’s decision to distribute fresh naira notes ahead of schedule, trading activity in the parallel market was calmer.
As currency dealers lower the naira leap before of the CBN deadline for exchanging old notes, the naira gained almost 2% week to conclude the week at N775 from N784 in the previous week’s closure. Trading statistics from the FX market suggest that market players kept bids at the investors and exporter FX windows between N444 and N452.
At the Investors’ window, total turnover declined by 7.1% from the beginning of the week to $422.66 million on Thursday, with trades consummated within the N431.00 – N463.05 band. according to Cordros Capital analysts’ notes.
In the forwards market, the naira depreciated by 0.5% to N451.47 for a 1-month contract and a 3-month contract dropped by 0.3% to N458.71.For 6-month contracts, the naira appreciated by +0.2% to N476.24 while the 1-year contract fell by 0.2% to N503.37.
Cowry Asset Management analysts anticipate the cool calm to continue across all segments of the FX market barring any distortion in the market and as the apex bank continues its weekly market intervention in the secondary market to shore up the naira.
“We expect the FX liquidity issues to remain over the short-to-medium term in the absence of any positive signal that denotes an improvement in FX supply relative to the pre-pandemic levels”, Cordros Capital analysts maintained. READ: Treasury Bills Yield Slumps as Inflation Fears Ease
Analysts said considering the tepid accretion to the reserves given low crude oil production and elevated PMS under-recovery costs, foreign portfolio investors (FPIs) which have historically supported supply levels in the Investors and exporters’ window will be needed to sustain FX liquidity levels in the medium to long-term.
“We think further adjustments in the exchange rate peg closer to its fair value and flexibility in the exchange rate would significantly attract foreign inflows back to the market”, Cordros Capital insists. # Naira Slumps to New Low as Demand for FX Rises
