Naira: FX Market Spooked as Court Overrides CBN Policy
Exchange rate movement across Nigeria’s foreign exchange (FX) markets wobbled as the Supreme Court overrides the monetary authority decision to face out N200, N500 and N1000 notes in the country.
The apex court decision casts doubt on the Central Bank of Nigeria’s (CBN) independence from political and other influences, according to analysts. The scarcity of new naira notes has worsened economic activities.
Unfortunately, the CBN has no immediate solutions to douse demand pressures emanating from local currency demand. Deposit money banks were shutting down operations due to rising attacks and FX rates swing both sides across the market.
On Friday, the Nigerian naira depreciated to N461.75 over demand pressure in the investors’ and exporters’ foreign exchange market.
Analysts said in a report that FX inflows into the official window in grew by about 11% in February 2023. This helped the exchange rate position strongly, curbing negative impacts of ever-increasing Nigeria import bills.
With sustained market intervention, Nigeria’s FX reserves nosedived, tracking behind 10 months of import coverage. Data from the CBN showed that gross external reserve declined by about $42 million to $36.65 billion in an effort to fight currency speculation.
In spite of the market support the CBN is giving to the Nigerian naira, the gap between official and open market rates has stretched to about N300. This is driving speculative activities in the FX market while US dollar hoarding continues to thrive.
In the parallel market, the exchange rate wobbled to N760 from N755 after Supreme Court weighed into the naira redesign imbroglio.
Signifying value placed on the local currency, trades were consummated within the N446.00 – N478.37 per United States dollar band at the official window. Non-deliverable forward rate settled at N612, according to data from Refinitiv.
In the forwards market, the naira rate increased across the 1-month contract, up 3.9% to N467.20. The 3-month forward contract gained 1.2% to N486.10, the 6-month forward contract appreciated 2.7% to N512.13 and the 1-year contract gained 5.3% to N543.35.
MarketForces Africa reported that the exchange rate movement has impacted some companies’ operations, recording large FX losses in the financial year 2022. By consensus, the naira is overvalued and weak macroeconomic conditions support a further valuation.
However, rather than for technical reasons, CBN has insisted on no devaluation while the market continues to punish the local currency exchange rates across the open and closed markets.
While the apex bank sticks to a decision not to devalue the naira, the local currency lost about 11% in 2022 and analysts are of the view that the CBN is merely postponing the inevitable.
Irrespective of the critic’s positions, the CBN view has not changed except for a decision to allow the naira rates to weaken in the latter part of 2022 without funfair. Bank of America estimated that the local currency is trading at 20% above fair value.
In its 2023 outlook, Cardinalstone expects the exchange rate to hit N500 at the official window, according to investment banking firm analysts’ note.
Citing data obtained from the FMDQ Exchange platform, investment banking analysts at Cordros Capital Limited told clients via email that total inflows into the Investors & Exporters Window increased by 10.7% to $937.60 million in February.
This signifies an improvement in FX positions when compared with $847.20 million supplied in the month of January 2023. Analysts attributed the increase to higher inflows from both the local, up 11.4% month on month to $816.90 million.
A breakdown shows that local contribution to the FX market accounted for 87.1% of total inflows. At the same time, foreign inflow jumped +5.9% month on month to $120.70 million, accounting for 12.9% of inflows. “Foreign inflows remain significantly below pre-pandemic levels”, according to investment banking analysts.
In 2019, the monthly average was $1.56 billion. There are FX liquidity constraints in Nigeria with macroeconomic indices sending a flurry of negative signals about growth outlook. FX Inflows scarcity has also been noted to occur as the local currency remained overvalued.
“Over the short-to-medium term, we expect FX liquidity conditions to remain frail in the absence of reforms to attract US dollar inflows into the economy.
“The low FX liquidity conditions will also be driven by lingering global uncertainties and higher global interest rates, limiting foreign inflows to the economy. Thus, foreign investors will need some convincing actions as regards flexibility and clarity in the FX framework going forward”, Cordros Capital analysts stated.
