Naira Value Crashes Despite Five FX Intervention Sales
The naira continued to underperform bullish expectations of major investment firms, including Goldman Sachs, Financial Derivate Companies, Renaissance, and others, amidst claim by the apex bank that the local currency is undervalued.
Nigeria’s foreign exchange crisis got so bad last week that even the monetary authority’s FX injections was unable to reverse the downtrend. The exchange rate closed weaker despite the fact that the Central Bank of Nigeria (CBN) conducted five forex market intervention with total US dollar injections worth $338 million.
It was a fight for survival in the foreign exchange market, where sustained demand for imports forced the Nigerian naira to descend for a kiss with the dragon, which caused the local currency to bleed.
Naira’s exchange rate had drawn long line between its estimated fair value of N900 and N1000 by Financial Derivative Company and Goldman Sachs. Other naira bulls’ investment firm had in April joined the predictions that the local currency would rebound.
Last week, the naira rate plunged further at the official market, closing at N1485.99 per US dollar due to weak supply side. FX demand remained elevated across currency markets, causing exchange rates to weaken while the country grapple with US dollar challenge.
While welcoming exchange rate appreciation in April, Nigeria Economic Summit Group, NESG, noted the perennial challenge of FX shortage in Nigeria, despite the country having great potential to enhance the productivity and export volumes of non-oil sector activities, including agriculture and manufacturing, as downside.
Major drag in the economy, and by extension is the weak FX inflows from foreign investors. NESG said a stable Naira would allow foreign investors to return to the country’s local-currency financial instruments (Treasury Bills, Government bonds, and equity), thereby reducing the country’s dependence on foreign-currency borrowing.
According to the Nigerian Stock Exchange Limited, foreign portfolio investment inflows surged to N93.4 billion in the first quarter of 2024, from N18.1 billion in the corresponding period of 2023. This had positively impacts improvement in exchange rate seen in April apart from FX sales to banks, and bureau de change (BDCs).
In the Nigerian autonomous foreign exchange market, the naira depreciated against the US dollar, trading at N1485.99 per dollar. This happened despite forex market intervention sales conducted by the Central Bank of Nigeria (CBN).
The apex bank resumed foreign currency sales to local deposit money banks as part of an effort to halt the naira from free falling. Unfortunately, the market swallowed FX injections without having positive impacts on an already empty FX market belly.
Data from the Central Bank of Nigeria’s (CBN) foreign reserves ended the week at $32.69 billion, falling by about -0.12% from the previous week’s close of $32.73 billion.
The monetary authority has allowed the naira to trade more freely on a willing-buyer, willing-seller basis since June 2023 and has leaned towards inflation targeting instead of controlling the money supply.
The exchange rate depreciated at the parallel market, trading close at N1430 after the apex bank halted subsidised FX sales to Bureaux de Change. In its latest circular, the CBN is asking currency traders in the informal FX market to re-register.
This suggests the apex bank has terminally stopped its $10,000 FX sales to BDCs. This explains why the local currency has seen market wide depreciation. In April, the naira rose to unprecedented heights following the recent FX interventions of the CBN, specifically through the sale of FX to the BDC operators.
The share capital of BDC operators was increased to N2 billion and N500 million for Tier 1 and Tier 2 licenses, respectively. The CBN also revoked more than 4100 BDCs certificates for various regulatory breaches. #Naira Value Crashes Despite Five FX Intervention Sales
