This is not the best of times for the naira. It crashed yesterday to N493/$ at the parallel market, losing N12 to the dollar within 24 hours. It closed on Tuesday at N481/$.
The sharp depreciation came a day after the Central Bank of Nigeria (CBN) devalued the naira at the official market to N410.25/$.
The fall in the currency rate has been linked to dollar scarcity and the hoarding of available greenback by forex speculators to maximize profit.
However, the pressure on Nigeria’s currency is attributed to black market speculators who have taken advantage of the Central Bank of Nigeria’s (CBN) newly adopted exchange rate to buy up and hoard dollars.
The Naira equally depreciated against the US dollar on Tuesday at the official NAFEX window to close at N411.56 to a dollar. This represents a 0.08 per cent drop when compared to N411.25/$1 recorded on Monday, May 24, 2021.
The Central Bank of Nigeria moved towards exchange rate unification as it further adjusted the exchange rate and formally adopted the Nigeria Autonomous Foreign Exchange (NAFEX) rate as the official rate.
On May 14, 2021, the Central Bank of Nigeria removed the previous exchange rate of N379//US$ from its portal while updating it to a new version. Yesterday, the updated platform confirmed that the CBN has now adopted the Nigerian Autonomous Foreign Exchange Rate (NAFEX), which stood at N410.25/US$ as of the close of business yesterday. This development formalizes the use of NAFEX as the official exchange rate of Nigeria.
In an e-mailed guide to investors, Financial Derivatives Company Managing Director Limited Bismarck Rewane, said delayering (unification) of the multiple exchange rate system which had bedeviled the Nigerian economy had been a subject of controversy for a long period.
He said: “Now that it appears settled we should expect a crawling peg method and an increase in forex supply to ensure equilibrium in the market. That notwithstanding, the CBN’s attempt to mop up excess liquidity could serve as a temporary antidote to consumer price inflation which still remains stubbornly high (18.12 per cent).”
Rewane had earlier attributed the naira’s continued decline to heightened forex supply shortage, demand pressure and rationing.
He said naira rates’ convergence would require adoption of a full floating exchange rate system determined by the forces of demand and supply.
Also, the International Monetary Fund (IMF) said exchange rate rigidities have constrained the economy’s ability to absorb external shocks.
According to the IMF, restrictions on access to foreign exchange for certain categories of goods and multiple exchange rates create distortions in both private and public sectors’ decision-making. They discourage long-term investment, encourage smuggling and provide avenues for corruption.
As a way forward, the Fund suggested removal of foreign exchange restrictions and full exchange rate unification, in line with the authorities’ Economic Recovery and Growth Plan (ERGP), will help keep the parallel market premium low in a more sustained manner.
It therefore called for unified exchange rate for the naira to promote growth and attractive foreign capital.
According to the IMF, foreign exchange backlog and shortages are intensifying Balance of Payment (BoP) pressures insisting that exchange rate unification was imperative to reduce BoP risks.
It said that fiscal deficit will stay elevated in the medium term, while additional domestic revenue mobilisation is required to reduce fiscal risks.
Forex Trading Associate, AZA, global forex trading dealer, Oghenefejiro Eduviere, said exchange rate volatility will persist, with inflation concerns mitigated by the rise in crude oil prices this year with Brent Crude now selling at $66.1 per barrel.
He said that rising oil revenue and increased remittance inflows following the ‘Naira for Dollar’ incentive policy have helped boost foreign exchange reserves from $34.845 billion to $35.22 billion so far this month, according to the CBN.
“Amidst the swings, we expect the overall trend will be a weakening on the parallel market towards N490 on inflation concerns,” Eduviere said.