Naira Weakens Despite CBN’s Intervention

Since the unification of all the official foreign exchange (FX) windows, the Naira has continued to depreciate against the US dollar, down by 39.6 per cent to N765.83/$ as of 11 October 2023 from N462.88/$ at the I&E Window. Based on the half-year financial markets report of the Central Bank of Nigeria, it has maintained its intervention in the foreign exchange market in an attempt to alleviate demand pressures and ensure exchange rate stability. A total of $6,439.33 million was sold at the foreign exchange market made up of spot sales of $1,557.47 million and forward sales of $4,881.86 million. The spot sales comprised $612.41 million sold at the inter-bank Secondary Market Intervention Sales (SMIS) window, $455.31 million sold to Small and Medium Enterprises (SMEs), $441.75 million for Invisibles, and $48.00 million sold at the I&E window while the bank purchased a total of $655.53 million in the FX market. However, the shocks of the policy have been more pronounced at the parallel market leading to a steep depreciation of the Naira to N1020/US$ on 10 October 2023. With little control over the depreciation of the nation’s currency, the then acting governor of the Central Bank of Nigeria (CBN), Mr. Fola Shonubi, announced plans to put in place new policies that would guide the dealings of FX to boost supply in the market. Apparently, the measures put in place have not been effective as demand for FX continues to rise amidst an acute shortage of supply. “We have always argued that while we believe the unification of the various FX rates is a pro-market policy that will be positive for the economy in the long term, the short to medium-term impact will be hard too hard on the average consumer. “A focus on rate convergence without structural reforms to increase the supply of FX will be a case of treating the symptoms while ignoring the underlying cause of the problem which is an acute shortage of supply amidst a growing demand for FX. Meanwhile, while crude oil sales and Foreign Portfolio Investments (FPIs) are two major sources of FX that have declined significantly, Oil production remains depressed, reported at 1.57 mbpd in September (highest so far this year) and are yet to see any significant foreign capital inflows. According to the Nigerian National Petroleum Company Limited (NNPCL), between September 30 and October 6, 128 crude oil theft incidents were recorded across the oil-producing areas of the Niger Delta. In the specific timeframe mentioned, there were numerous illicit activities in the oil sector. These included 17 cases of unauthorized connections, 27 illegal refineries, 11 infractions related to vessel tracking systems (AIS), and 49 instances of wooden boat arrests.

Analysts Forecast Increased Pressures On Economy As Naira Depreciates By 23%

With the naira losing 23 per cent value in the third quarter of 2023, plummeting from N770/$1 at the end of the second quarter to over N1000/$1 by the end of the third quarter at the parallel market, analysts expect further pressure on the currency in the fourth quarter of 2023. Meanwhile, the official exchange rate at the end of the third quarter was N755.27/$1, a noticeable drop from N769.25/$1 at the end of the second quarter. The widening gap between the official and unofficial rates reflects the persistent scarcity of foreign exchange in the country, as well as the divergent policies of the CBN and the market forces. The Central Bank of Nigeria (CBN) has blamed the forex backlog estimated at between $6 billion to $10 billion as the major reason for the currency depreciation. At the recent Senate confirmation of the CBN governor, Yemi Cardoso stated that he intends to establish the exact unsettled obligations and find ways to “take care of it” confirming that progress will not be made without clearing the backlog. He said it would be naive to think that the CBN will be able to make progress if it don’t handle that side of the foreign exchange. “But definitely, the immediate priority will be to verify the authenticity and extent of the unsettled obligation and once we do that, we need to look for a way to take care of it. The naira’s weakness has had negative impacts on the Nigerian economy, as it has increased the cost of imports, fuelled inflation, eroding purchasing power, and discouraged investment. According to the Head of Macro Strategy at FIM Partners UK Ltd, Charlie Robertson, the CBN may have to devalue the official rate again to align it with the market reality and conserve its dwindling external reserves, which fell from $34.1 billion at the end of June to $33.2 billion at the end of September. He noted that further devaluation might be avoided if the apex bank is able to meet its obligations to clear forex backlogs, adding that achieving this might require the government tap new loans from friendly countries. Stears Africa FX Monitor, a data and intelligence company, also has predicted a continued naira volatility. The company highlighted fiscal policies, external trade, and global market trends, including inflation rates, interest rates, policy events, and geopolitical factors as key factors affecting the naira’s performance. Fadekemi Abiru, Head of Insights at Stears, expressed concerns about the naira volatility. “The continued unpredictability of the naira underscores the importance of timely and informed decision-making for businesses and investors in Nigeria,” she said. The CBN had removed trading restrictions on the official market in June which drove the naira to a record low of N750 to the Dollar on the official market, down from the previous N477 to the dollar it traded for. This was the first time since 2016 that the naira had recorded a big fall on the official market before the CBN introduced a managed exchange rate in 2017.