Naira Depreciates 10% as Dollar Shortage Messed up FX Rates
By force and/or by subtle adjustments, naira depreciates more than 10% in 2021 as the Central Bank adjusted to a new tolerance level after Godwin Emefiele, the apex bank Governor had vowed not to devalue the local currency.
Following high foreign exchange pressures and volatility, Naira was messed up with a series of devaluations that have failed to actually solve a key pressure issue facing the local currency – dollar shortage amidst rising demand.
At the investors and exporters foreign exchange window, Naira hits N435 a dollar last Friday in the just concluded year from N394.30 at the beginning of 2021.
A similar scenario played out in the parallel market where the local currency sheds more than 20% last year alone against the United States dollar.
Naira is losing steam, other than for immediate transaction purposes, the local currency has lost key features as investors would rather hold the dollar in its stead.
This is contributing to a weakening purchasing power of the naira and fueling foreign exchange speculation given the wide gap between official and parallel market rates.
Last week, some analysts said the apex bank allowed FX rate adjustment at the Investors and Exporters FX window, though external reserves still trending strong.
Nigeria is battling with high demand for foreign currencies but has been unable to generate enough even as foreign investors shy away from participating in the local market.
Foreign investors’ decision to keep away from the local market, according to analysts, multi-lateral lender, IMF, including MSCI Index is due to inability to get United States dollar out from Nigeria – a steep capital control measure seen last year.
MSCI Index had threatened to downgrade Nigeria index mid-2021 due to what it considered the inability to repatriate funds. Also, the IMF mission had advised the apex bank on the unification of multiple exchange rates, and the adoption of a market-clearing rate.
In the official window, the local currency dropped off 10.3% of its purchasing power on perceived renewed tolerance for devaluation by the monetary authority between January and December 2021.
Data from FMSQ Exchange shows that at the investors and exporters foreign exchange window, naira fell about 5% in a single trading session to N435 from N415 per the United States dollar.
MarketForces Africa review shows that on the Central Bank website, there was a subtle devaluation of the local currency to N413.49 on 31st December 2021.
In 2021, the local currency was N381 at the interbank foreign exchange market before it adjusted to N430 – about 13% devaluation booked at a go.
The Central Bank rate was N379.50 while its selling rate was N380 on 4 January 2021. Following its subtle devaluation move, the CBN has adjusted the FX rate to N412.99 with buying and selling rates at N412.49 and N413.49 to a dollar respectively.
Nigeria’s core issue with foreign exchange management has been low dollar inflow amidst rising demand for imports bills. CBN continues to manage the FX supply side, banning and streamlining supply via various channels to plug loopholes.
It has not really worked well for the nation that depends largely on imports for consumption and further productions of goods and services – lagging behind the fourth industrial revolution.
Some pundits however lamented that CBN has not done enough to keep monetary stability.
“You would innocently wake up in Nigeria and the news you hear about currency management indicates you are poorer – every devaluation weaken Naira value”.
Some analysts said it could be about time to take a drastic step to save the local currency from losing its steam.
While the Central Bank records some naira adjustments, the parallel market where forces and demand and supply influences exchange rate price down the local currency – more heavily.
Naira was down 20.21% in 12-month, according to foreign exchange markets data obtained by MarketForces Africa from official sources.
Seeing that the local currency is overvalued, according to the real effective exchange rate model, analysts across Broadstreet maintain devaluation expectations.
The International Monetary Fund’s mission had advised the Central Bank to unify its exchange rates and adopts a market-clearing rate.
MarketForces Africa noted that this is not the first time the multilateral lender comes with such advice, which has remained unyielding. In the parallel market, the story hasn’t been anything different.
Naira was traded at N565 to a dollar on Friday from N570 – 572 range. Some currencies traders said there was inflow from Diaspora, driven by the Christmas celebration.
In January 2021, the exchange rate in the parallel market was pegged at N470, peaked above N575 sometimes within the year due to policy reversal by the CBN and subsequent market reactions.
Towards year-end, demand for imports transactions was lower compared to dollar inflows from individuals that systemically boycotted the financial system for conversion to naira equivalent.
Despite large external reserves, there has been mild intervention in the foreign exchange market, though demand for dollars to settle imports bills has been on ascendancy.
Most companies booked FX losses in their financial statements due to devaluation of the local currency, hobbled by lack of hedging opportunities in the local financial markets.
With a shortage of dollars, Nigeria’s FX reserve sustained its decline toward the year-end as the CBN maintained its interventions in the foreign exchange market. Thus, the gross reserves closed lower at US$40.526 billion.
The gap, estimated at 40%, between Central Bank approved window, and the parallel market encourages currency speculation in the country. #Naira Depreciates 10% as Dollar Shortage Messed up FX Rates
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