The naira on Friday extended depreciation against the dollar falling to N1,533.99 per US dollar on the official market due to a surge in demand for the US dollar.
The local currency came under pressure following the return
of FX liquidity scarcity at official and parallel markets.
According to data obtained from FMDQ, the naira depreciated
by 5.14% to N1,533.99 per US dollar at
the Nigerian Autonomous Foreign Exchange Market (NAFEM). The naira bulls have
disappeared since exchange rate made 360 degree U-turn.
Goldman Sachs had reviewed its expectation that the naira
would trade at N1000 per dollar. The investment firm turned bullish on the
local currency when exchange rate beat its N1,200 within short time that the
firm anticipated.
The Central Bank of Nigeria’s (CBN) drive to boost liquidity
across forex market has eased due to US dollar shortage in the economy. FX
inflows into the financial market eased, though external reserves have climbed
for 16 days since the gross balance hit a low of $32.106 billion on April 19.
But Fitch estimated that around 30% of Nigeria’s reserves
are made up of FX bank swaps, although analysts expect most of these to
continue to be rolled over. NNPCL has entered into an oil-for-loans swap
arrangement that affects accretion into external reserves. The authority plans
to borrow more than $2 billion from a multilateral lender, the IMF, in June,
2024 ahead of the US dollar bond sales plan to support the budget deficit.
According to analyst reviews, Nigeria’s external reserves
balance remains weak due to existing obligations, and this may have handicapped
the apex bank’s ability to support the naira in the forex market. The monetary
authority’s willing buyer, and willing seller FX model has been subjected to
criticism on an account that the country relies heavily on foreign or imported
goods for consumption and industrial use.
In the parallel market, the naira closed at ₦1,520 against
the US dollar as demand for foreign currency reduced purchasing power of the
local currency. Today, oil prices rally in the global commodity market. Brent
crude rose by 0.28% to $82.98 per barrel, while West Texas Intermediate (WTI)
crude also increased by 0.45% to $78.99 per barrel.
Global ratings agency, Fitch, recently upgraded Nigeria’s
outlook to positive from stable, citing economic reforms under the new
administration. The agency noted that efforts to restore macroeconomic
stability and boost policy credibility, including exchange rate and monetary
policy adjustments, among others.
The Central Bank of Nigeria (CBN) reported that Nigeria’s
external debt service grew by 39.70% to USD1.12 billion, up from USD801.36
million in Q1:2023. This surge was driven by the higher cost of borrowing – as
rates remain high globally – and the continuous depreciation of the naira.
Notably, the report indicated that Nigeria spent about 70%
of dollar outflow on servicing external debt during the period. Analysts expect
a further increase in the government’s debt service as the naira depreciates
further.
Fitch said greater formalisation of FX activity and monetary
policy tightening have contributed to a significant rise in foreign portfolio
investment inflows, and a fast appreciation of the naira at the official FX
window, following the 71% post-liberalisation depreciation between June 2023
and mid-March 2024, although the exchange rate remains volatile.
However, Fitch views the continued lack of clarity in the
size of net FX reserves as a constraint on the sovereign’s credit profile.
Nigeria’s foreign reserves peaked at USD34.4 billion in mid-March. With
sustained FX injections, and other eligible obligations, gross external
reserves fell to $32.106 billion.
“We forecast FX reserves to fall to 4.2 months of current
external payments in 2024, from 4.4 months at the end of 2023,” Fitch said.
Nigeria’s external reserves remain weak given the
import-dependent nature of the local economy and private sector activities.
Analysts feel the net FX reserves balance is shrouded in secrecy.
“Uncertainty continues over the net FX reserve position,
with a particular lack of clarity on near USD32 billion of “FX forwards, OTC
futures, and currency swaps” recorded as an off-balance sheet “commitment” in
CBN’s last consolidated financial statement for 2022”, Fitch said in its latest
rating update. CPPE Advocates Flexible
Monetary Policy Stance to Address Inflation.