Naira Reclaims Value after Banks Update on FX

Naira Reclaims Value after Banks Update on FX

The Nigerian naira gained across foreign exchange (FX) markets after local banks release fresh updates on foreign currency sales to their customers. In the investors and exporter window, the Nigerian naira ended the previous week at N445.67 to a United States dollar.

Demand pressures slow down at the Nigerian Autonomous Foreign Exchange Fixing (NAFEX) window as the exchange rate had crossed N460, it was opened at N445.75 in the just concluded. 

The scarcity of foreign exchange has worsened the naira exchange rate in the official and unofficial markets, and things may get worse ahead of the 2023 election. Apart from that, historical data indicates that the exchange rate often gets worse in the latter part of the year due to higher demand for imports while there is often less than nothing to export apart from crude oil.

Unfortunately, crude export has underperformed expectations, resulting in low FX receipt which has kept external reserves tight. It is unlikely for the naira to win an exchange rate battle with currencies of productive economies even with the multi-tiered exchange rate system.

In Nigeria, it has been different quote for different purpose and exchange rate has been offered to large company at CBN-determined special rate other than by forces of demand and supply.

It is a bleak future for the local currency with structural economic reforms with a convergence of various exchange rates topping the apex bank agenda.  Last week, International Monetary Fund (IMF) in a report said a unified and market-clearing exchange rate remains critical to enhancing confidence. 

It said continued FX shortages, a stabilized exchange rate regime, rising inflation, limited debt servicing capacity, and administrative restrictions on current transactions fuel devaluation speculations.

“These factors hinder much needed capital inflows, encourage outflows and constrain private sector investment”, IMF said.

Also, the mission reiterated its past recommendations to move towards a unified and market-clearing exchange rate by dismantling the various exchange rate windows at the CBN accompanied by clarity on exchange rate policy and supportive fiscal and monetary policies.

In the medium term, it said the CBN should step back from its role as the main FX intermediator, limiting interventions to smoothing market volatility and allowing banks to freely determine FX buy-sell rates.

In the black market, there was a relatively low heat-up after the previous spurious demand for the greenback that greeted the naira redesign announcement. 

Last week, after communication with the Central Bank of Nigeria (CBN), a number of deposit money banks released updates on the amount of permissible dollar purchases for business/personal travel allowances. 

Still, Broadstreet FX analysts have not changed their view on the local currency. MarketForces Africa’s discussion with analysts indicates the market expects devaluation of the naira which a slew of analysts believes remained overvalued.

At the investors’ and exporters’ FX window, market participants maintained bids between N444 and N452 while at the open market, bids ranged between N735 and N750.

At the Interbank Foreign Exchange Forward Contracts market, the spot exchange rate remained unchained from the previous week as it closed the week at N445 from last week. READ: Naira Reclaims Value as Nigeria Mulls Eurobond Raise

Analysts at Cowry Asset anticipate the cool calm to continue across all segments of the FX market barring any distortion in the market and as the apex bank continues its weekly market intervention in the secondary market to shore up the naira.

However, the investment firm believes that the news around banks rationing FX for BTA and PTA purposes may likely bring about pressure on the local currency as users will flood the open market, sourcing for the greenback. Nigeria’s FX reserve recorded another decline this week for the eleventh consecutive week, dipping by $14.11 million w/w to $37.19 billion.

“We expect the FX liquidity issues to remain over the short-to-medium term in the absence of any positive signal that denotes an improvement in FX supply relative to the pre-pandemic levels.

“.. Considering the tepid accretion to the reserves given low crude oil production and elevated PMS under-recovery costs, FPIs which have historically supported supply levels in the IEW will be needed to sustain FX liquidity levels in the medium to long-term.

“Hence, we think further adjustments in the exchange rate peg closer to its fair value and  flexibility in the exchange rate would significantly attract foreign inflows back to the market”, Cordros Capital maintained position.# Naira Reclaims Value after Banks Update on FX

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