FX Scarcity Likely to Persist as Oil Price Trades Range Bound

FX Scarcity Likely to Persist as Oil Price Trades Range Bound

Analysts have explained that foreign exchange scarcity may persist as long as oil price remains range bound, hovering between $40 to $45 per barrel since gradual easing of global economic lockdowns.

Some 90% of foreign revenue accrue to government come from oil exports with lower support base from non-oil related segment.

The petrol-dollar powered economy has suffered great set back maintaining economic growth trajectory on the back of COVID-19 related pressure.

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In the second quarter of 2020, amidst lower capital inflow, the Nigeria’s economy shrank 6.1% year on year as gross domestic products berthed below $400 billion.

Though, the country had planned to join top 20 economies with $900 billion GDP size by 2020.

Lower accretion into the external reserve has weaken drive to support the local currency, naira, in the foreign exchange market.FX Scarcity Likely to Persist as Oil Price Trades Range Bound

Though, currency traders observed that speculative purchases and inability of the CBN to meet demand are among pressure points observed thus far.

In its note, Chapel Hill Denham said as with the prior week, the dollar to naira remained unchanged on a week-on-week basis at ₦379.00, ₦380.69, and ₦386.00 at the official, SMIS, and I&E windows, respectively.

However, analysts explained that even as the CBN sustained its weekly intervention, liquidity at the I&E window deteriorated significantly as average daily turnover dipped by 58.5% week on wee to US$70.18 million.

Also, after depreciating by 2.15% week on week in the previous week, the naira traded flat against the greenback in the parallel market, closing at ₦465.

Chapel Hill Denham said the premium between the I&E window and the parallel market rates remained stubbornly high at 20.4%, despite the resumption of FX sales to the BDC segment.

“In our view, the blend of the backlog of accumulated FX demand, together with the hunt for alternative FX market by the segments that have been restricted by the CBN from accessing FX in the official window, continued to fuel sizeable demand in the parallel market”, the firm noted.

In its last policy meeting, Chapel Hill Denham said the CBN Governor did not offer any guidance on the outlook for the currency and FX management framework.

This, according to the firm, indicates that the CBN will continue playing the waiting game while hoping for a rebound in oil prices.

It said with oil prices remaining stuck at US$40 – 45/b range, the FX liquidity challenges will likely continue in the near term, with pressures likely to increase due to credit-fuelled demand.

VIAJulius Alagbe
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