Naira stability worsened by declining Dollar inflow

Naira stability worsened by declining Dollar inflow

A number of factors are conspiring to compound the challenges being faced by the Central Bank of Nigeria (CBN) in its bid to achieve stability in the nation’s foreign exchange market.

According to the data at the FMDQ Security Exchange where forex is traded officially, exchange rate between the naira and the US dollar opened at N414.283/$1 on Friday 14th, after it closed at N414.29 to a $1 on Thursday, 13th January 2022.

On the other hand, sources at Bureau De Change (BDC) disclosed that players at Lagos Parallel Market (Black Market) bought a dollar for N567 and sold at N570 on Friday, January 14th 2022.

In what has become a trend, naira had fallen to a record low over-the-counter on the last trading day of 2021, closing at N435/$. This came amid uncertainty about the market outlook as the economy wobbled into a new year.

With the closure rate, naira had sold at a discount of over 15 per cent to a dollar at the official Nigerian Autonomous Foreign Exchange (NAFEX) window last year.

Trading opened last year at N410/$ but the exchange rate fell to about N415/$ as the year rolled by, though it also traded at N415/$ after the Christmas holidays, with extremely wide swings, indicating high volatility of the market.
Like it has been every year since 2014, the naira finished 2021 weaker than it started, losing about N90 per dollar or 19 per cent at the highly speculative parallel and six per cent or N25.7 per dollar at the official trading window.

About two years ago, the CBN had pledged its commitment to rally convergence around NAFEX. Last year, it replaced the default CBN official rate, the benchmark used for government transactions, with NAFEX, but a full rate harmonisation has not been attained.
Experts say nothing short of “a single exchange rate implementation would help to clear the market and restore equilibrium.  According to them, the market would need to be deepened with more participants enlisted to reduce the intervention of the apex bank and make it a truly market-driven window.

NAFEX is often touted as the anchor of the planned liberalised market, but in its current formation, it is pseudo-market led as the apex bank regularly intervenes to shore up supply.
The recent tumbling of the naira at the official window is being interpreted differently. While some experts see it as the beginning of a more liberalised market, others say the local currency may adjust upwardly in the coming days.

On the last trading day of 2020, there was a similar ‘blip’ as the naira lost 4.2 per cent on the spot market, widely quoted by foreign investors’ and exporters’ (I & E) window. The naira closed at N410.25/$, which was hailed as the effective take-off of the much-expected convergence. But a few days into 2021, there was an intervention from the monetary authority, an action that helped the local currency to regain lost ground.

Executive vice-chairman of Highcap Securities Limited, David Adonri, said the 3.5 per cent depreciation of the naira in a single trading day reflected dwindling supply and a signal that the illiquidity challenge could enter the new year.
“It means Nigerians will have to brace up. The challenges are not yet over. That depreciation underscores the precarious state of the market,” Adonri noted.

Adonri’s position corroborates the Economic Review for 2021 and Agenda for 2022 report released recently by the Centre for the Promotion of Private Enterprise [CPPE], which stated that the distortions inherent in the foreign exchange market will persist in 2022.
The report signed by the centre’s Chief Executive Officer, Dr Muda Yusuf, a major advocate of market-determined exchange rate., stated that the challenge of forex to investors in last year was multidimensional, adding that the FX challenge will be a key issue for investors in 2021.

Last year, the banking sector regulator made frantic efforts to shore up the supply of FX and contain anti-market activities. The Naira-4-Dollar Scheme, a policy that sought to increase remittances through official channels, was created as a follow-up to other reforms in the money transfer market that started in 2020.
The apex bank also withdrew the weekly funding of BDCs operators and handed over business/personal travel allowance (B/PTA) dollar sales to commercial banks. The efforts, notwithstanding, the crisis in the FX market has continued.

A professor of applied economics, Godwin Owoh, had previously warned that the expected intra and inter-party campaigns ahead of the 2023 general elections would exacerbate the financial stress index and compound the monetary regulation challenges.

He said the appetite of politicians for the greenback would increase demand for FX and put more pressure on the naira. He charged Nigerians to prepare for harder times, stressing that the odds do not favour a stable FX market this year.

With capital flight expected to increase this year as election approaches alongside rising insecurity, Owoh said: “Nigerians should expect higher FX illiquidity.

“There has not been stability in the past six or seven years. The political campaign will only add to the challenge. I don’t think Nigerians should expect anything better than they have seen in the past years. What we have now is a baseline that will incrementally get worse as we progress into 2022 and 2023.

“Again, change of government may not make much difference because whoever will emerge will need to negotiate and accept the status quo. It does not matter if the person is from the South or North. So, Nigeria will have to be in trouble for more than eight years,” Owoh warned.

Last week, a report by Bismarck Rewane’s Financial Derivatives Company (FDC) underlined that many policies by the CBN have failed to bridge the gap between the officially managed forex window of the apex bank and the parallel market, which several forex users resorted to.

“Although the CBN has implemented some forex management policies, like the naira4dollar promo and the recent exchange rate adjustments to improve naira stability and forex inflow, they are insufficient to ensure a naira convergence”, Rewane stated.

“Hence, there is the need to improve the productive side of the economy and leave the official forex rates to be market determined. This will promote naira convergence in the medium to long term.

“A reduced spread will decrease the incentive (arbitrage) for speculators to obtain forex at the official market and resell at the parallel market. This may result in panic dumping of dollars at the parallel market due to the concern of lower demand for forex and appreciation of the dollar at the parallel market.”

CBN governor, Godwin Emefiele  had explained that Nigeria, like other emerging market countries reliant on oil exports, the retreat by foreign portfolio investors significantly affected the supply of foreign exchange into the country.

“With the decline in our foreign exchange earnings and successive exchange rate adjustments, the CBN has continued to implement a demand management framework, which is designed to bolster the production of items that can be produced in Nigeria, and aid conservation of our external reserves,” Emefiele  said.

He added that the apex bank has continued to favour a gradual liberalisation of the foreign exchange market in order to smoothen exchange rate volatility and mitigate the impact which rapid changes in the exchange rate could have on key macro-economic variables.

 

Source: Business Hallmark

Author: Greg