Naira Tumbles as High FX Spread Stokes Speculative Demand
The Nigerian local currency, naira, tumbles in the investors and exporters window to N412.88 a dollar as speculative demand rises due to higher foreign exchange spreads amidst the Central Bank threats.
In the parallel market, foreign currencies traders exchange a dollar for N570 as speculative demand doused legitimate requests for the greenback as Nigeria faces scarcity of dollar inflows. The unofficial devaluation of the naira seen in the black market space has widened FX spreads on the local currency to about 40% when compared to the official exchange rate at N412.
Analysts polled by MarketForces Africa said the only way out for naira is for Nigeria to attract foreign currency inflows into the economy. Tempting as it is, the CBN cannot afford to rock the boat with an increase in benchmark interest rate which has been sustained at 11.5% around MPR parameters – making the country a less attractive destination for foreign investors.
The situation which also worsened by foreign exchange backlog, though CBN insists that the apex bank will meet legitimate FX demand. MarketForces Africa gathered from reliable currencies traders that Bureau de change operators sold a dollar at N560-N565 at the weekend.
The CBN has in its circular warned banks about its foreign exchange policy infractions, saying customers that access foreign currencies for business and personal travelling allowance must adhere to its processes.
Since the CBN’s recent FX policy, the naira has taken a turn for the worse in the parallel market as inflow remains below the pre-pandemic period while FX demand is on the rise. In July, the apex bank stopped weekly dollar supply to bureau de change operators, while at the just concluded monetary policy committee, the apex bank officially derecognised the channel.
CBN said it is not best practice to supply foreign currencies to bureau de change and promised not to reverse the decision that ends weekly dollar supply to operators. Since the policy authority banned the sale of FX to bureaux de change and froze the accounts of several fintech firms for various infractions, the naira has taken the turn for the worse.
The CBN’s several unorthodox attempts to stabilise the naira this year are yet to show any signs of success, analysts at Tellimer said in a report. Adding that instead, fundamentals continue to prevail as the shortage of FX supply compared with demand has left the market in a steep deficit.
Recent data releases show that foreign investors have continued to steer clear of the Nigerian market and unsurprisingly so, given many investors’ funds are still stuck in the un-cleared backlogs.
Capital imports are yet to recover to pre-Covid levels, with Nigeria attracting only US$876 million worth of capital in the second quarter – the lowest amount since the last FX crisis, in the first quarter of 2016, Tellimer stated.
Analysts said Nigeria’s trade balance has also posted 18 months of consecutive trade deficits from January 2020 to the latest data release of June 2021, cited data from the National Bureau of Statistics.
Amidst capital control measures to stem the external reserves from free-falling, the foreign exchange backlog remains steep in relation to inflow and balance in the foreign currency reserves.
Tellimer stated in its report that the CBN first quarter data show that US$30 billion in investments are still owed to foreign portfolio investors – US$26.7 billion of debts and US$3.7 billion in equities space. Debt to the foreign portfolio at the period include US$800 million of T-bills, US$11.3 billion of government bonds and US$14.3 billion of open market operations bills.
“This is a higher amount than that of January 2020 when outstanding foreign portfolio investments stood at US$23 billion. We believe the data takes into account the impact of the naira deprecation last year”, Tellimer said.
In line with expectation, Naira further depreciated against the greenback by 0.21% to N412.88 at the Investors and Exporters FX window as demand appears to have outweighed supply.
Also, Naira depreciated at the Bureau De Change and Parallel markets by 4.09% and 4.59% to close at N560.00 and N570.00 respectively, leaving the local currency on a free fall against the greenback even as the Monetary Authority has refused to recognise these markets, said Cowry Asset Limited.
Last week, the CBN injected $210 million into the forex market. Of the sum, a total of $100 million was allocated to Wholesale Secondary Market Intervention Sales (SMIS), $55 million was allocated to Small and Medium Scale Enterprises and $55 million was sold for Invisibles.
Analysts at Cowry Asset expect Naira to further depreciate against the dollar as CBN’s intention to go against illegal dealers in the forex market may take time before the desired results begin to manifest.
Despite the pressure, Nigeria’s FX reserves sustained its weekly accretion as it closed higher by $507.08 million week on week to $35.37 billion – its highest level in six months, according to Cordros Capital.
At the Investors and Exporters window, analysts said total turnover or volume of dollars traded increased by 20.1% from the beginning of the week to $847.54 million, with trades consummated within the N400.00 – 439.54 to a dollar band.
In the forwards market, the rates on the 1-month (-0.8% to N416.25/$), 3-month (-0.9% to N420.90/$), 6-month (-1.6% to N429.67/$), and at the 1-year (-2.5% to N445.4/$) contracts reflected depreciations relative to the United States dollar.
Read Also: Banks Pitch FX Sales, Explain Requirements to Customers
Cordros Capital expects improved liquidity in the Investors and Exporters FX window over the medium term, given an expectation of increased oil inflows in line with the rise in crude oil prices and $6.18 billion inflows from foreign currency borrowings and $3.4 billion IMF SDR.
