While demand remained on an upward trend, the naira fell at the Investors’ and Exporters’ foreign exchange (FX) market due to a persistent lack of US dollars. The high demand for imports of goods and services without corresponding FX inflows for net off is what primarily drives the pressure in the currency market.
The Nigerian Exchange (NGX) said that amid economic uncertainty, the overall volume of transactions carried out by foreign portfolio investors (FPIs) plummeted. The top bank’s decision to begin OMO sales, however, had little effect on overall inflows.
“The economy is dollarised, and the risk is heavy – whosoever had predicted that exchange rate at the open market would cross a thousand naira could have been jailed for it”, a senior economist said in a chat with MarketForces Africa.
Data from FMDQ revealed that at the organized foreign exchange market for investors and exporters, the local currency declined by 1.5% to N756.21 per US dollar. Due to Nigerians’ heavy reliance on imported goods and services at intermediate and final stages of industrial processes, exchange rates have plummeted across the market.
On Wednesday, according to FX dealers, the open indicative rate for the US dollar ended at N766.72. Prior to settling at N756.21, the day’s trade peaked at a spot exchange rate of N799.90 to the US dollar.
Market records show that throughout the day’s trade, the naira was sold for as little as N701 to the dollar. The investors and exporters window saw trades totaling US$95.70 million on Wednesday.
While demand has continued to increase, total foreign inflows have been limited, and most times subject to the volume of crude oil exported by Africa’s largest economy. The Central Bank of Nigeria’s (CBN) devaluation of the local currency has been noted to be inconsistent with immediate development in the local economy. This has worsened the gap between the official and parallel market rates.
In the parallel market, the exchange rate has crossed N1,000 benchmark, a worrisome development that left Nigerians dazed about the quality of economic policy.
“It will get worse, certainly, before it gets better – if even it will get better”, research analysts at LSintelligence Associates told MarketForces in an email. The Nigerian Exchange said in a report that transactions declined in August, driven by weak sentiment experienced by local and foreign investors alike.
In its market commentary, Cordros Capital said foreign transactions which14.2% of gross transactions on the exchange recorded a second consecutive month of decline, falling by 8.3% month on month to N37.16 billion in August from N40.54 billion in July. Analysts at the firm attributed the development to the government’s reform-induced momentum which has now slowed, dampening foreign sentiments.
Last week, the Nigeria Autonomous Foreign Exchange Fixing (NAFEX) rate traded within the range of N590-N851 per US dollar but closed at N755.3, according to data from FMDQ.
This points towards a depreciation of -1%% or N7.5 over a week, Coronation Research said in its market update. The exchange rate worsened due to increased demand for making payments for imported goods and services. Unfortunately, Nigeria is earning less from oil export sales which account for about 80% of the federal government’s revenue.
In the forwards market, exchange rates settled within N790-N850 per greenback. In the 1-month contract, fx depreciated by -1.2% to close at N791.1 and in the 3-month contract, fx depreciated by -0.9% to close at N803.1.
In the parallel market, the US dollar was exchanged for N1008, leaving the gap between the NAFEX and parallel market rate is 33.4%. According to data from FMDQ, NAFEX turnover decreased by -26.5% or USD170.6 million over the week to USD472.5 million on Friday.
The NAFEX window recorded an inflow of USD310.3 million with the CBN accounting for 20.6%, FPIs accounting for 2.2%, non-bank corporates accounting for 28.4%, exporters accounting for 33.2%, and others accounting for 15.6%.
Despite higher crude oil prices, Nigeria’s external reserves decreased by USD34.3 million to USD33.2 billion. The U.S. dollar and oil prices are surging in tandem, creating a dual threat for global economies, companies and consumers.
Nigeria’s leading investment firm banking firm, CardinalStone Limited, projected that the negative impacts of a weaker currency and stubbornly high inflation will likely worsen in the second half of 2023. #Naira Devaluation Deepens Economic Crisis in Nigeria
For companies, analysts said the devaluation of the naira at the Investors and Exporters FX window that trailed the monetary policy reforms could drive the costs of imported raw materials higher and stoke material foreign exchange losses.
FX analysts maintained that most consumers are insulated from the impact of the naira depreciation as they mostly access FX in the parallel market.
