At the backdrop of sustained supply gap in Nigeria’s foreign exchange (forex) market, the local currency, Naira, has hit a new low at the weekend, trading N803.9 to a dollar in the Investors & Exporters (I&E) window which is the official forex market and N822/$ in the parallel market.

Financial Vanguard’s findings indicated a 6.6 per cent decline in volume of dollars traded in the I&E window as dealers said they were disappointed that the increase in supply they expected last week did not materialize.

A week-on-week trend in the parallel market shows a 5.5 percent depreciation to N822/$ as against N779/$ closing rate previous week.

In the I&E window, the local currency depreciated 3.9 percent W-o-W to N803.9/$ from N776.9/$ the previous Friday.

Financial Vanguard currency monitor shows that after the initial massive depreciation on June 14th, 2023 when the Central Bank of Nigeria, CBN, introduced reforms in the market, exchange rate had remained volatile with daily fluctuations until the record low was hit last weekend.

The reform majorly eliminated multiple exchange rates and reintroduced the ‘Willing Buyer Willing Seller’ market model in the I&E window.

Since the new measures were introduced, the Naira has depreciated cumulatively in the I&E window and parallel market by 70 per cent (N321.23) and 7.0 per cent (N58) respectively.

Meanwhile last week’s closing rate also indicated that the parallel market margin that narrowed to almost elimination following the new policy has started widening.  

While the measures announced by CBN was aimed at increasing transparency and boosting confidence in order to attract increased forex supply, forex market operators who spoke to Financial Vanguard said the expected increase in supply is yet to materialize, adding that this, coupled with rising demand, and hoarding, are the factors driving the renewed depreciation of the naira in both segments of the forex market. 

Speaking to Financial Vanguard, Mr. Ahmed Danjuma, a parallel market operator in Lagos Island, said: “I bought a dollar for N810 and sold for N819 and N820.

“People are demanding for the dollar. It is not easy to get dollars from the bank because it is very scarce.

“When you have access to dollars the way buyers demand for the currency is like when you take food to the prison. 

“The supply is very low. Even Bureau De Changes have little access to the foreign currency.”

Similarly, Mr. Umoru Mohammed, a parallel market operator at Ikotun area of Lagos, said: “Dollar was very scarce today (last Friday) as we could hardly have access to it even from the banks.

“Every day the demand for dollars increases but the supply is very little. This is really hindering business especially for transactions requiring dollars.”

President, Association of Bureaux De Change Operators of Nigeria, ABCON, Aminu Gwadabe, in a chat with Financial Vanguard on the situation, stated: “The situation is tough, it even traded at N822 in some segments today (last Friday). 

“You know now the restrictions have been removed, there is also competition and surge in demand. Most people are still holding assets in dollars, and we have not seen significant inflows even from the side of the investors.”

Turnover, external reserves fall

Reflecting the paucity of forex supply amidst rising demand, the volume of dollars traded (turnover) in the I&E window fell by 6.6 per cent or $57.06 million to $807.92 million in the first half of July, from $864.98 million in the corresponding period in June. 

Following the same trend, the nation’s external reserves fell by $646 million or 1.9% in one month ending July 13th. Data from the CBN showed that the reserves fell to $34.047 billion on July 13th, from $34.693 billion on June 13th. 

Analysts’ insight

To reverse this trend and achieve the expected increased forex inflow, analysts said the CBN must introduce further reforms including removing forex restriction on 43 items and incorporating BDCs into the I&E window as well as clearing the forex demand backlog. 

In this regard, Managing Director/CEO Financial Derivatives Company, Mr. Bismarck Rewane, in his  Monthly Economic News and Views, said: “In the short term the CBN must tighten monetary conditions,  eliminate forex restrictions (Ban on 43 items on the I & E window) and move  effective interest rates towards the rate of inflation.”

The above, he added, 

”must be complemented in the long term with export-oriented policies, elimination of structural bottlenecks that constrain production and export activities”

In the same vein,  analysts at Lagos based CardinalStone Research, in their outlook for H2’23, said: “While the current policy reforms bode well for foreign providers of capital, additional investments into the country will also be partly dependent on the following: 1) the willingness of the CBN to clear existing backlogs, which is estimated at $2.5 – $3.0 billion; 2) the FX market reflects a genuine “willing buyers and willing sellers” structure and supply begins to improve notably. If the 2 highlighted points are achieved, we see legroom for a surge in foreign inflows from the multi-year lows of $5.3 billion in 2022 to about $12 billion over the next one year.”

On this Gwadabe averred that the CBN must increase participation in the official market to include BDC who can play the moderating role needed to stabilise the market.

“The trend will continue except if there is a turnaround, and there are changes in the I&E to bring in more players like BDCs to enhance competition. Once you have competition there will be stability, there will be availability 

“They need to wear their thinking cap, because it is like the CBN is not in control of the market, it is the FMDQ. “We are still appealing to the CBN to include BDCs in order to increase liquidity, transparency, and ensure we stop the volatility in the market competition.”

Corroborating this position, a former top management staff of the CBN, who spoke on condition of anonymity said: “We must find a way out to stabilise the exchange rate and still keep the third leg (BDC) as part of the moderator of the market. 

“We must eliminate abuses, corrupt practices and police the market for sustainability. We also need to restructure the BDC to trade in the market and not by allocation to moderate the rates.”

According to analysts at Cowry Assets Management Limited, “The Naira hit a new low in 2023 in the face of pressure demand for the dollar across various forex segments as forex demand and supply mismatch continue to play as an underlying driver with more backlog of unmet forex demand.” 

Vanguard