Despite claims by the apex bank that the local currency is undervalued, the naira has underperformed the optimistic forecasts of big investment organizations, such as Goldman Sachs, Financial Derivate Companies, Renaissance, and others.
Last week, Nigeria’s foreign exchange crisis was so acute that not even FX infusions from the monetary authorities could stop the decline. Despite the Central Bank of Nigeria’s (CBN) five forex market interventions totaling $338 million in US dollar injections, the currency rate ended the day lower.
The Nigerian naira was forced to kiss the dragon in the foreign exchange market due to persistent demand for imports, causing the local currency to bleed. It was a battle for survival.
Naira’s exchange rate had drawn long line between its estimated fair value of N900 and N1000 by Financial Derivative Company and Goldman Sachs. Other naira bulls’ investment firm had in April joined the predictions that the local currency would rebound.
Last week, the naira rate plunged further at the official market, closing at N1485.99 per US dollar due to weak supply side. FX demand remained elevated across currency markets, causing exchange rates to weaken while the country grapple with US dollar challenge.
While welcoming exchange rate appreciation in April, Nigeria Economic Summit Group, NESG, noted the perennial challenge of FX shortage in Nigeria, despite the country having great potential to enhance the productivity and export volumes of non-oil sector activities, including agriculture and manufacturing, as downside.
Major drag in the economy, and by extension is the weak FX inflows from foreign investors. NESG said a stable Naira would allow foreign investors to return to the country’s local-currency financial instruments (Treasury Bills, Government bonds, and equity), thereby reducing the country’s dependence on foreign-currency borrowing.
According to the Nigerian Stock Exchange Limited, foreign portfolio investment inflows surged to N93.4 billion in the first quarter of 2024, from N18.1 billion in the corresponding period of 2023. This had positively impacts improvement in exchange rate seen in April apart from FX sales to banks, and bureau de change (BDCs).
In the Nigerian autonomous foreign exchange market, the naira depreciated against the US dollar, trading at N1485.99 per dollar. This happened despite forex market intervention sales conducted by the Central Bank of Nigeria (CBN).
The apex bank resumed foreign currency sales to local deposit money banks as part of an effort to halt the naira from free falling. Unfortunately, the market swallowed FX injections without having positive impacts on an already empty FX market belly.
Data from the Central Bank of Nigeria’s (CBN) foreign reserves ended the week at $32.69 billion, falling by about -0.12% from the previous week’s close of $32.73 billion.
The monetary authority has allowed the naira to trade more freely on a willing-buyer, willing-seller basis since June 2023 and has leaned towards inflation targeting instead of controlling the money supply.
The exchange rate depreciated at the parallel market, trading close at N1430 after the apex bank halted subsidised FX sales to Bureaux de Change. In its latest circular, the CBN is asking currency traders in the informal FX market to re-register.
This suggests the apex bank has terminally stopped its $10,000 FX sales to BDCs. This explains why the local currency has seen market wide depreciation. In April, the naira rose to unprecedented heights following the recent FX interventions of the CBN, specifically through the sale of FX to the BDC operators.
The share capital of BDC operators was increased to N2 billion and N500 million for Tier 1 and Tier 2 licenses, respectively. The CBN also revoked more than 4100 BDCs certificates for various regulatory breaches.
