Naira Falls Sharply to N1105 at Official Market
The Nigerian naira fell to a new record low of N1,105 to the U.S. dollar on the official market on Thursday down from N830 at its close on Wednesday, London Stock Exchange Group data showed, Reuters said in a report.
Exchange rates have been swinging negative across the forex market due to the existing US dollar shortage despite FX backlog repayment. Foreign investors’ sentiment has been impacted by past dealing in Nigeria, LSintelligence Associates said in a chat with MarketForces Africa.
Broadstreet analysts’ outlook on the exchange rate after a large official devaluation in June skewed to the downside due to a slowdown in the Central Bank of Nigeria (CBN) market intervention.
This was supported by a lower buffer required to keep the exchange rate movement in check. Lately, the external reserve has been on a decline. It had surged for 4 weeks due to increased oil production volume and higher oil prices.
Nigeria Holds No Plan to Defend Naira
Nigeria has no luxury of defending the local currency amidst sharp daily losses in the autonomous foreign exchange market. Although oil prices have continued to trend above the budget benchmark, accretion into external reserves has been limited in 2023.
“One of the major goals of external reserves is to support and maintain confidence for monetary and exchange rate management.
“Conventional rule of thumb to measure reserve adequacy argues that months of import cover should be at least 3”, FSDH said in a macroeconomic update. Nigeria’s gross external reserve settled at $33.4 billion on Friday, covering more than 7 months of imports.
While the reserves appear strong enough to defend the local currency from freefall, Nigeria has steep FX-related liabilities that have weakened its market intervention capability.
After the Central Bank of Nigeria released its audited financial statements, JP Morgan estimated that net FX reserves could only cover less than one month of imports.
Data showed the foreign reserve has declined successively, from $37.1 billion at the close of 2022 to $33.4 billion on Friday.
Pressure on external reserves is largely a result of higher demand for foreign currency to meet goods imports and service payments, FSDH said. This comes even when there are limited inflows due to weak foreign investors’ confidence about Nigeria’s risk. Naira Devaluation Deepens Economic Crisis in Nigeria