PRESSURE BUILDS ON NAIRA, FALLS TO N1,740 ON PARALLEL MARKET
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There are signs that the local currency is about to entirely reverse its gains as the depreciation trend reaches a new high, reaching N1,740/$1 on the parallel market after the close of trade last weekend.
However, the Naira remained constant with little appreciation in the Nigerian Autonomous Foreign Currency Market, NAFEM, as dealers expect the Central Bank of Nigeria, CBN, to intervene at any time to relieve pressure on the currency rate.
According to FMDQ data, the indicative exchange rate for NAFEM declined to N1,600 per dollar from N1,601.2 per dollar on Thursday, implying a naira appreciation of N1.2.
Dealers who talked with Financial Vanguard over the weekend said they estimate the exchange rate to close this month around N1,750/$1, while 2024 might end at more than N1,800/$1.
If this pattern continues, by the end of the year, the local currency will have wiped all the gains it earned in March of this year, when it unexpectedly appreciated massively, falling from an all-time high rate of N1,820/$1 in February 2024 to N1,310/$1 and then N1,240/$1.
However, the appreciation was halted in April, and depreciation began and continued until last week.
Year on year, YoY, the Naira depreciated on the parallel market by 70.5 percent to N1,705 per dollar at the end of third-quarter trade on September 30, 2024, down from an average of N1,000/$1 in September 2023.
Year-to-date, YtD, depreciated by 16.7% from N1,490 per $1 in January 2024.
The Naira fell by 104% year on year in the official section, NAFEM, to N1540.78 per dollar in September 2024, down from N755.27 in September 2023.
However, YoY NAFEM has recorded just 9.9 percent depreciation to N1600/$1 last weekend from N1,455.9/$1 in January 2024.
Analysts and dealers blamed the sustained depreciation of the local currency on supply shortages.
Fiscal and monetary authorities play different songs.
The monetary and fiscal policy authorities appear to see the situation from different perspectives. At the most recent Monetary Policy Committee (MPC) meeting, CBN Governor Mr. Yemi Cardoso, who also serves as the MPC Chairman, noted that members of the MPC had detected a correlation between the period of FAAC disbursement and demand pressures in the foreign exchange market.
According to him, the apex bank will watch future FAAC allocation disbursements to assess their influence on the FX market.
Cardoso stated: “Furthermore, members observed a strong correlation between FAAC releases and liquidity levels in the banking system as well as its impacts on the exchange rates.”
“The committee therefore agreed to increase monitoring of future releases to address its effects on price development.”
This approach gives the perception that budgetary activities have undermined exchange rate stability due to demand pressures.
However, last week in Washington DC, on the sidelines of the recently concluded World Bank Group annual meetings, the Minister of Finance and Coordinating Minister of the Economy, Mr. Wale Edun, stated that the problem with Nigeria’s foreign exchange market is supply, which Nigeria could address by significantly increasing its oil production output.
He stated: “The key about the foreign exchange market really is supply and as you know we are an oil-producing country, we just need to get our oil production up and that will deal with that issue of foreign exchange supply and pressure on foreign exchange anytime there are large flows.”
This implied that rather than demand pressure from whichever quarters, the problem is inadequate supply.
Meanwhile, forex dealers have said the acute shortage amidst demand pressures has shifted the exchange rate near the Central Bank of Nigeria’s (CBN) “fear index”, a development which they believe would compel the apex bank to launch emergency defensive measures including raising the volume of supply intervention involving all dealers to boost FX liquidity.
They also believe such a reaction from the apex bank would prevent the exchange rate from further deterioration and possibly pull it back from the fear zone.
Since August 8, the CBN has not conducted retail Dutch FX auctions it resumed in 2024 as the apex bank tinkers with a ‘minimal intervention’ approach, a behaviour some dealers believe was not unconnected with the challenges of limited forex resources available to it.
Some of the dealers told Financial Vanguard that the expected intervention from the apex bank would be complemented by a plan by the CBN to test-run its new Automated FX Trading model next month.
The model which is designed to enhance transparency and controls in the market, is planned to go live from December, ditching a nearly decade-old over-the-counter trading system in a bid to enhance transparency and remove market distortions.
According to the apex bank, the new system would “facilitate a market-driven exchange rate accessible to the public”.
In a circular released on October 02, 2024 which provided the guidelines for the new system, the CBN stated: “This development is expected to reduce speculative activities, eliminate market distortions and give the CBN improved oversight.”
The CBN said a two-week test run would be carried out in November, without specifying the exact dates.
Naira may rank worst globally
The current rate of depreciation would likely present Naira as the worst-performing currency worldwide in 2024.
The Federal Government had celebrated the sharp appreciation of the Naira in March 2024, noting that the development ranked it as one of the best-performing currencies then.
However, with the renewed depreciation trend, the World Bank, last week ranked the Naira amongst the worst-performing in sub-Sahara Africa.
Dealers comment
Commenting on the state of the parallel market, some of the dealers told Financial Vanguard about their supply and demand situation in the official market.
According to them, when big buyers fail to get supply from the official market they resort to the black market.
They also said the supply they get from some people connected in the official market may be difficult to get, a situation which makes the USDollar to be very scarce and forces the exchange rate to go up.
Mr. Liasu Moshood, a black market trader said: “The depreciation of Naira in the market is due to the rush for dollars by importers who don’t have access to the official foreign exchange market. “There is less dollar supply everywhere and not all of us come to the market now because you can hardly get dollars you want to trade.
“These importers are sourcing large amounts of dollars from our market because those Bureau De Changes cannot meet their demands. Even the banks.
On his part, Mr. Idris Daud, a trader projected the dollar to close the month at N1,750 per dollar and end the year at N1,800 threshold. “Today, the dollar is sold between N1,730 and N1,740, especially by top foreign exchange black market dealers.
“The demand pressure now is high as more organizations are trying to import goods for the festive season in December and at the same time some are trying to restock before year-end as they are not certain what the foreign exchange rate might be before the end of the year. This is another reason for the pressure.
“There is also less inflows of foreign exchange getting to our end and we end up with little supply.
“I foresee the naira closing this month at N1,750 against the dollar and in the next three months at N1,800 per dollar on the back of continued pressure on demand and supply factor.”
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