Naira Sees One Side Gain as FX Gap Hits N260
The rising demand for foreign currency is negative for FX convergence despite two large devaluations of the Naira in less than 8 months. The ongoing economic reform in Nigeria has worsened macroeconomic indicators.
Some analysts said something must give up – it is either that the official rate worsens or the Naira’s exchange rate in the parallel market appreciates strongly- for exchange rates to achieve FX convergence.
On that note, analysts are of the view the naira will remain subdued throughout the first half of 2024. Pressure on the naira eased on one side and worsened at the other end yesterday. The official exchange rate rose against the US dollar slightly while the parallel market rate crossed N1802.
The naira appreciated by 0.56% against the US Dollar in the Nigeria autonomous foreign exchange market window, closing at a rate of ₦1,542.58, FMDQ data showed. The gain is seen as unimpressive when considering the range at which the local currency has been trading in the past weeks as a result of demand pressures in the forex market.
To achieve currency stability, the apex bank continues to deploy regulatory might to stop the naira from free-falling – closing all loopholes to boost forex liquidity in the market. The US dollar and other foreign currency scarcity have been a downside to achieving results. Import appetite remains strong despite another large devaluation of the naira in January.
The central bank intervened at the official window with foreign currency injection, but the level of FX demand was higher than the combined market supply. In the parallel market, the Naira weakened against the US dollar to close at N1,802 per US dollar. This widened the gap between official and unofficial exchange rates to N260.
FX Market Turnover
The NAFEM rate traded within the range of N922.40-N1,631 per greenback but closed at N1,537.90 according to FX market data on Friday. According to data from FMDQ, NAFEM turnover decreased by -56.2% or USD 1.4 billion to USD 1.1 billion last week.
Meanwhile, the NAFEM window recorded an inflow of USD 1.1 billion. For 19 consecutive weeks, CBN failed to inject FX inflows into NAFEM window, according to Coronation Research. However, foreign portfolio investors accounted for 53.7%, of FX volume; non-bank corporates accounted for 13.9%, exporters accounted for 15.4%, and others accounted for 17%.
Analysts told MarketForces Africa that there is a level of currency speculation that the naira can accommodate amidst willing buyers’ and willing sellers’ FX model. They said a large FX gap could rubbish CBN FX reforms and efforts to keep the naira strong. Pressures in the FX market are expected to be mildly relieved through efforts by the CBN to clear backlogs and improve liquidity, WSTC Securities Limited said in a report.
In its note, WSTC Securities Limited said the FX market is expected to remain pressured particularly in H1 2024. However, as the monetary authorities intensify efforts to address existing backlogs with proceeds from foreign borrowings, and implement other policies to enhance FX liquidity, analysts said they cautiously anticipate restoring investors’ confidence in the Nigerian economy.
