Article Summary
- The Naira recorded a significant depreciation across several markets, with the Nigerian Autonomous Foreign Exchange (NAFEX) closing at N464.51/$1, and the black market rate dropping to N780/$1.
- A record intraday high of N632/$1 was noted at the NAFEX window, showcasing a significant gap between the closing rate and intraday rates.
- The Central Bank of Nigeria’s (CBN) interventions have struggled to stabilize the exchange rate due to the high demand for foreign currency, which has led to a depletion of external reserves.
The exchange rate at the official Nigerian Autonomous Foreign Exchange Rate Fixing (NAFEX) window sold for as high as N632/$1.
However, the official rate closed at N464.51/$1 on Friday, May 26, 2023, representing a slight appreciation of 0.02% compared to N464.59/$1 recorded on Thursday, May 25, 2023.
However, at N632/$1 the spot sale at the NAFEX window on Friday is the highest intraday rate ever recorded since the introduction of the window in 2017.
This indicates a significant gap between the official closing rate and the highest intra-day rates, suggesting traders were willing to buy forex at a significant premium above the CBN-induced closing price.
The CBN has been trying to stabilize the exchange rate by increasing its interventions in the various segments of the foreign exchange market. However, these interventions have not been sufficient to meet the demand for foreign currency and have depleted the external reserves.
The external reserves stood at $35.1 billion as of May 23, 2023, down by $1.9 billion from $37 billion at the end of December 2022. The CBN explained the drop was attributable to transactions in the foreign exchange market and largely to miniscule accretion to reserves from crude oil exports.
The black market rate worsens
Meanwhile, the black market rate depreciated further to N780/$1 on Friday, May 26, 2023. This represents a decline of 1.96% compared to N765/$1 recorded on Thursday, May 25, 2023. The black market rate has been on a downward trend all week due to rising demand for the greenback.
The depreciation of the black market rate reflects the persistent pressure on the naira due to increased import demand, low oil prices, weak remittances, and capital flight.
The widening gap between the official and parallel market rates poses a serious challenge for the Central Bank of Nigeria (CBN) and the federal government especially as a new government is set to take over.
This disparity between the official and black market rates can be attributed to factors such as liquidity challenges, speculative activities, and increasing demand for forex due to import dependency.
What the CBN is saying
This situation puts the Central Bank of Nigeria (CBN) under increased pressure as they seek to manage the country’s exchange rate, alongside inflation, amidst a troubled economy.
- Nigeria’s foreign exchange policy has always been a subject of controversy, and these recent developments will undoubtedly fuel this debate.
- At the MPC meeting held on Wednesday 24th of May, the CBN said it was optimistic that the continued progress made with the RT200, Nairafor dollar, and other policies targeted at attracting trade and diaspora remittances would continue to support accretion to reserves and improve liquidity in the foreign exchange market.
Policy not working
The scarcity of forex suggests investors are not repatriating money into the country preferring to keep them abroad. Fiscal pressures due to lower crude oil sales proceeds, also mean the central bank has less mileage to protect against further depreciation in the short term.
- Many experts believe that this continuous decline of the Naira might put more pressure on the country’s inflation rate, already standing at a double-digit rate of 22.22%.
- It could also adversely affect Nigeria’s foreign reserves, posing additional challenges to the economic recovery post-COVID-19.
- The potential long-term implications of this depreciation could be profound, impacting everything from import costs to the repayment of external debts.
Businesses and individuals who rely on foreign exchange for their operations could find themselves facing increased costs and potential financial distress.
Optics
The outlook for the exchange rate appears gloomy amidst high inflation and limited dollar inflows from foreign investors
- In this economic climate, it is essential for investors and businesses to stay informed and prepare for potential volatility in the foreign exchange market.
- Stakeholders are advised to exercise caution while making foreign exchange decisions during these uncertain times.