Naira 'Melts' Amidst Dirty Exchange Rate Predictions

The Nigerian local currency, the naira, lost strength in the foreign exchange (forex) market due to growing demand for the United States (US) dollar by importers, manufacturers and individuals across the economy. 

The exchange rate worsened on Friday, though the naira reclaimed value at the parallel market due to a slowdown in forex demand in the space. The local currency depreciated by 2.78% at the official market to close at N885.88 per US dollar on Friday, trading data from the FMDQ FX OTC platform showed.

MarketForces Africa reported that the exchange rate printed at N861.91 at the Nigerian autonomous foreign exchange market on the previous day. In 2023, the exchange rate crossed N1,000 for the first time in the Nigeria Autonomous Foreign Exchange (NAFEX) market due to accelerated demand for foreign currency.

A surge in FX demand was met with a lower supply side, forcing the rate to depreciate by 30% in a day. Similarly, in the parallel market, the Naira also depreciated by 0.58% to close at N1,205 to the US dollar due to increased demand for the greenback.

The market continues to grapple with an imbalance created by lower FX supply against surging demand for the US dollar, and other major currencies. For 2024, several currency traders have predicted the local currency would cross N1,000 per US dollar due to the apex bank’s absence from intervening in the FX market.

The negative movement in the official exchange rate would reduce FX spread, and curb currency speculation, according to analysts’ reviews. Scarce US dollar inflows into the economy remain a major challenge in the forex market.

The Nigerian government redeemed $1.8 billion in foreign loans during the year. However, the authority has indicated a plan to visit the international debt capital market to raise funds for financing spending plans for 2024.

In the global commodity market, oil prices showed a positive trend above the $70 per barrel mark, with Brent Crude increasing by 0.69% to trade at $79.94 per barrel and WTI also rising by 0.72% to trade at $74.42 per barrel on Friday. The market expects year-end remittances from Nigerians in the diaspora to saturate the foreign currency market.

However, there appears to be a swing in the pattern observed over the past years. Instead of rates coming down at the black market on an expectation that some Nigerians would seek to exchange US dollars, and other foreign currencies to naira.

The parallel market has seen sporadic increases in forex demand instead, casting doubt on a projection that the local currency will regain balance in 2023.  Naira Devaluation Deepens Economic Crisis in Nigeria

Still, Nigeria’s foreign reserves remained tight below $32.8 billion, according to data from the Central Bank website. The gross external reserve has seen low accretion from forex sources but the government plans some foreign currency raise.

While the timing isn’t clear yet, there is a probability that the debt office could make the move in the first quarter of 2024 after President Bola Tinubu sought approval from lawmakers.

While demand for imports continues to rise, Nigeria has seen strong and uptight forex scarcity, and the challenge has forced the market to devalue the local currency –official and by forces of demand and supply.

Amidst a bleak outlook for the Naira exchange rate, the Central Bank of Nigeria has redirected its FX management style after part payment of its FX backlog. Weighing this against Nigeria’s strong import appetite, some analysts say a switch away from dirty float would hit the naira front, back and centre in the coming months.

“Who would have thought that the official rate would cross N1,000 ever? A country that produces and sells oil in the international market and with gross external reserves below $33 billion…it’s unexplainable”, a senior economist who prefers not to be mentioned told MarketForces Africa. #Naira Melts Amidst Dirty Exchange Rate Predictions