Naira Defends Position against US Dollar Dominance
Somehow, a heavy load of foreign currency demand pressures that has always eclipsed the total supply available in the forex markets eased this week, helping to reduce the value of the naira required to obtain a United States (U.S.) dollar.
Exchange rates at official and open markets strengthened week on week as the volume of foreign currency was sufficient for demand by manufacturers, and importers logged FX demand. According to data from the FMDQ, the exchange rate clicked at N741 against the dominant foreign currency, the US dollar despite a slowdown in global prices of oil.
This week, the oil market witnessed a significant decline in prices, primarily driven by the surge in fuel inventories and mounting apprehensions regarding demand. The West Texas Intermediate (WTI) plummeted to $82.50, while Brent crude traded at $84.23. Meanwhile, there remain certain fundamental indicators suggesting a potential uptrend in prices in the coming week.
Likewise, the price of Nigerian Bonny Light crude oil closed below the $100 mark, falling to $93.26 per barrel as demand fears began to creep into the market. The exchange rate edged the dollar by 1.78% week-on-week at the official market, closing at N741.85. Also, at the parallel market, the naira appreciated by 0.79% week-on-week to 1,000/$1 as demand pressure eased from forex users.
Nigeria still struggles to boost external reserves, though the oil price has remained about 2023 budget benchmark. As a result of weak revenue from hydrocarbon sales, the government continues to borrow to finance the budget.
In a recent update, Coronation Research said the relationship between exchange rates and oil revenue in Nigeria is inverse. A depreciation of the Naira relative to the US dollar results in an increase in oil revenue.
However, analysts said the reverse would be the case in the event of an appreciation of the Naira relative to the US dollar. The impact of the recent liberalization policy lays credence to this, as the FGN recorded a boost in the oil revenue value as seen in the exchange rate differential.
“The performance of the oil economy impacts key macroeconomic indicators such as GDP, inflation, and fx. Periods of high oil prices mean improved oil revenue and fx earnings for an oil-exporting country like Nigeria.
“This rubs off on other critical sectors of the economy leading to improved economic activities. However, the underperformance of the oil sector continues to inhibit growth and by extension, the overall GDP”, Coronation Research said.
Analysts said diversifying the economy to reduce dependency on the oil economy is crucial for Nigeria’s economic stability and growth. #Naira Defends Position against US Dollar Dominance Naira Devaluation Deepens Economic Crisis in Nigeria