Naira Skids as FX Market Sees 4% Decline in USD Supply

The naira exchange rate depreciated by 1.80% to close at N890.54 per US dollar at the Nigeria Autonomous Foreign Exchange Market, data from the FMDQ platform revealed. This is coming after the FMDQ report revealed the forex market inflow dropped by 4% in December 2023.

The exchange rate at the Nigeria Autonomous Foreign Exchange Market had crossed N1,035 due to tight FX market supply amidst rising demand.  Analysts reported that trades were consummated within the N475.00 – N1,289.00 per US dollar band last week in the market.

 For three months, the central bank has left exchange rate determination to forces of demand and supply. In its effort to boost market morale, the apex bank started to offset the FX backlog estimated to be about $10 billion in 2023.

Looking into 2024, some analysts see a negative exchange rate movement due to a shortage of US dollar inflows in Nigeria. The financial market has been baptised with negative interest yield amidst a rising inflation rate. This has kept foreign investors to stay away from the fixed income market where inflation has eclipsed return on investment.

Despite low FX inflows, the equities market has continued to rally, gaining N13 trillion last year following solid local investors’ participation. In the parallel market, the Naira closed at N1,269 per dollar. The exchange rate pattern has now widened the gap between official and black market rates has widened further.

According to the data obtained from FMDQ, total inflows into the Nigerian Autonomous Foreign Exchange Market (NAFEM) declined by 4.0% month on month to USD1.37 billion in December 2023 from USD1.43 billion in November. Naira Rises by 19% as Forex Market Pressures Ease

In its market report, Cordros Capital said the breakdown provided showed a broad-based decline across the local (82.7% of total inflows) and foreign sources (17.3%). Analysts said local inflows declined by 2.6% month on month to USD1.13 billion from USD1.16 billion in November.

The decline was primarily due to a 15.4% decline in inflows from Exporters in the month amid substantial increases in Individuals’ inflows, up by 1678.6%. Similarly, inflows from foreign sources remained underwhelming, declining further by 9.9% to USD 237.10 million in December from USD 263.20 million in the previous month.

Analysts said foreign investors remained cautious about returning in droves following Nigeria’s FX market inadequacies. Overall, the total inflow into the NAFEM window averaged USD1.17 billion in 2023 versus USD1.24 billion in 2022. Analysts at Cordros Capital Limited expect FX liquidity conditions to remain frail in the near term as FX reform momentum has slowed considerably.

In addition, the investment expects subdued foreign inflows in the short term, as foreign investors are likely to adopt a cautious approach.

“We anticipate an improvement in foreign participation over the medium term, propelled by expected FX inflows as guided by the authorities and CBN’s recent actions aimed at clearing its FX backlogs”, Cordros Capital Limited said in a note. #Naira Skids as FX Market Sees 4% Decline in USD Supply