Pressures Erode Naira Value Despite Foreign Currency Reserves Jump
Demand pressures erode naira value despite accretion to the Nigerian external reserves following stable global prices of oil and government plan to improve crude supply. Even with dollar inflow, assets denominated in the Nigerian local currency saws value erosion as the foreign exchange rate at the investors and exporters window slides.
At the Investors and Exporters FX window, analysts at Cordros Capital hinted that total dollar volume transacted turnover decreased by 39.8% from the beginning of the week to $512.81 million, with trades consummated within the N404.00 – N448.30 a dollar band.
Naira could touch N420 at the official window if the level of demand seen in the latter part of the year continues, MarketForces Africa gathered. The projection was anchored on the fourth quarter effect as companies move to increase productivity for the current year.
Meanwhile, guide by expectations of foreign currency inflow multiple sources, some analysts indicate expectations dollar volume transactions would recover strongly in the latter part of the year.
Worsened by the steep headline inflation rate, the purchasing power of the local currency has remained weak after series of devaluations driven by a shortage of dollar inflows.
Data check from the Central Bank shows that there was an improvement in foreign currencies inflow this week, which analysts believe would help the local currency amidst weekly intervention.
Despite the increase in the dollar supply, the naira depreciated in the foreign currency market, fell by 0.22% in the investors and exporters foreign exchange window to close at ₦414.30.
Meanwhile, it traded worse after a 0.35% declined in the black market, closing at ₦575 a dollar, according to the Bureau de change operators.
Naira has been devaluated by the forces of demand and supply at the open currency market outside the purview of the monetary authority regulations. The CBN had in July policy meeting halted weekly dollar supply to bureau de change operators and re-affirmed the same position in September meeting with official de-recognition of BDCs operators in FX chains.
‘Supplying dollar to BDCs isn’t best practice around the world’, the CBN said. With dollars flow into the country from Eurobond raise and special drawing rights, Nigeria’s dollar ledger has seen a boost.
External reserves has moved near a $40 billion mark, supported by foreign borrowings as total public debts closed the first half at N35.5 trillion, according to data from Debt Management Office.
Specifically, Nigeria’s external reserves gained $1.40 billion from the closing position of $36.78 billion as of Thursday, 30 September 2021 to $38.18 billion on Thursday 7th October 2021.
Inflow from oil has improved and Eurobond raise plus special drawing right provide a reasonable explanation for the accretion, investment banking analysts told MarketForces Africa.
Due to an improved demand outlook and recovery in the global economy, crude oil prices rise to a 3-years high, with support from OPEC+ sustained production agreement.
The oil rallies continue this week on signs that some industries have begun switching fuel from high-priced gas to oil and on the doubts the U.S. government would release oil from its strategic reserves for now.
The crude oil market also finds support with OPEC+ group sticking to its planned output increase rather than raising it further. Consequently, the Brent rose by 3.92% to close at $82.39 per barrel, while the Nigeria oil benchmark (Bonny Light) climbed by 5.81% to $82.18 per barrel.
Analysts at Cordros Capital maintain an expectation of improved liquidity in the investors and exporters foreign exchange window over the medium term.
The expectation was anchored on increased oil receipts in line with the rise in crude oil prices and inflows from foreign currency borrowings and special drawing rights approved by the International Monetary Fund.
Read Also: Naira Steady at Investors Window as Foreign Reserves Rise
In the forwards market, the rate was flat at the 1-month (N415.60) contract, while the 3-month (-0.2% to N421.01), 6-month (-0.3% to N429.44), and 1-year (-0.4% to N445.68) contracts reflected depreciation of the naira to the greenback. #Pressures Erode Naira Value Despite Foreign Currency Reserves Jump
