Recent indicators suggest that the local currency may be on the verge of fully reversing its recent gains, as the depreciation trend escalates, with the parallel market closing at N1,740/$1 last weekend. In contrast, the Naira has demonstrated some stability, experiencing a slight appreciation in the Nigerian Autonomous Foreign Exchange Market (NAFEM). Market participants are speculating that the Central Bank of Nigeria (CBN) might soon intervene to ease the pressure on the exchange rate.
According to data from FMDQ, the indicative exchange rate for NAFEM has fallen to N1,600 per dollar, down from N1,601.2 per dollar on Thursday, indicating a N1.2 appreciation of the Naira. Traders interviewed by Financial Vanguard over the weekend expect the exchange rate to stabilize at approximately N1,750 per dollar by the end of this month, with forecasts for 2024 indicating it may surpass N1,800 per dollar.
If this trend persists, the local currency could erase the gains it achieved in March of this year, when it experienced a significant appreciation, dropping from an all-time high of N1,820/$1 in February 2024 to N1,310/$1 and further to N1,240/$1.
The appreciation of the Naira came to a halt in April, leading to a period of depreciation that continued until last week.
Year-on-Year (YoY), the Naira experienced a significant decline in the parallel market, depreciating by 70.5 percent to N1,705 per dollar by the end of third quarter trading on September 30, 2024, compared to an average of N1,000 per dollar in September 2023. Year-to-Date (YtD), the currency fell by 16.7 percent from N1,490 per dollar in January 2024.
In the official market segment, known as NAFEM, the Naira saw an alarming YoY depreciation of 104%, dropping to N1,540.78 per dollar in September 2024 from N755.27 in September 2023.
However, in the most recent week, NAFEM recorded a more modest YoY depreciation of 9.9 percent, settling at N1,600 per dollar, down from N1,455.9 per dollar in January 2024.
Analysts and market participants attribute the ongoing depreciation of the local currency to supply shortages.
There appears to be a divergence in perspectives between fiscal and monetary authorities regarding this issue.
During the latest Monetary Policy Committee (MPC) meeting, CBN Governor Mr. Yemi Cardoso, who also chairs the MPC, indicated that the committee had observed a link between the timing of FAAC disbursements and demand pressures in the foreign exchange market.
He noted that the central bank would closely monitor future FAAC allocations to assess their impact on the FX market.
Cardoso had stated: “Furthermore, members observed a strong correlation between FAAC releases and liquidity levels in the banking system as well as its impacts on the exchange rates.”
“The committee therefore agreed to increase monitoring of future releases with a view to addressing its effects on price development.”
The current market perception is that fiscal actions have been negatively impacting exchange rate stability due to demand pressures.
However, during a recent meeting in Washington DC, the Minister of Finance and Coordinating Minister of the Economy, Mr. Wale Edun, highlighted that the primary issue affecting Nigeria’s foreign exchange market is supply-related.
As an oil-producing nation, Nigeria has the potential to address this challenge by substantially increasing its oil production output.
He stated: “The key about the foreign exchange market really is supply and as you know we are an oil-producing country, we just need to get our oil production up and that will deal with that issue of foreign exchange supply and pressure on foreign exchange anytime there are large flows.”
This suggests that the issue at hand is not due to demand pressures from various sources, but rather a lack of adequate supply.
In the meantime, foreign exchange dealers have indicated that the severe shortage, coupled with demand pressures, has brought the exchange rate close to the Central Bank of Nigeria’s (CBN) “fear index.”
They believe this situation will necessitate emergency measures from the central bank, including increasing the volume of supply interventions across all dealers to enhance FX liquidity.
These dealers also anticipate that such actions from the CBN will help stabilize the exchange rate and potentially prevent it from slipping further into the fear zone.
Since August 8, the CBN has refrained from conducting retail Dutch FX auctions, which it had resumed in 2024, as it adopts a ‘minimal intervention’ strategy. Some dealers speculate that this approach is linked to the limited forex resources available to the bank.
Additionally, some dealers informed Financial Vanguard that the anticipated intervention from the CBN will be supported by a plan to pilot its new Automated FX Trading model next month.
This model aims to improve market transparency and control, with plans to go live in December, replacing a nearly decade-old over-the-counter trading system to eliminate market distortions.
The CBN asserts that the new system will “facilitate a market-driven exchange rate accessible to the public.”
In a circular published on October 2, 2024, which outlined the parameters for the new system, the Central Bank of Nigeria (CBN) stated: “This development is expected to reduce speculative activities, eliminate market distortions and give the CBN improved oversight.”
The Central Bank of Nigeria (CBN) announced a forthcoming two-week trial period scheduled for November, without disclosing the specific dates.
The Naira is poised to be one of the poorest performing currencies globally.
The ongoing depreciation suggests that by 2024, it may be recognized as the worst currency in the world.
In March 2024, the Federal Government had hailed the Naira's significant appreciation, highlighting its status as one of the top-performing currencies at that time.
However, with the recent trend of depreciation, the World Bank has now classified the Naira among the least performing currencies in Sub-Saharan Africa.
Regarding the current state of the parallel market, several dealers shared their insights with Financial Vanguard, highlighting the supply and demand dynamics in the official market.
They indicated that when substantial buyers are unable to secure the required supply from the official market, they turn to the black market as an alternative source.
Additionally, the dealers mentioned that obtaining supply from certain individuals connected to the official market can be challenging, leading to a scarcity of US Dollars and a subsequent increase in the exchange rate.
Liasu Moshood, a black market trader, stated that the depreciation of the Naira in the market is a result of the increased demand for dollars by importers who are unable to access the official foreign exchange market.
He explained that there is a limited supply of dollars available, and not all traders are able to obtain the amount of dollars they need for their transactions.
As a result, importers are sourcing large amounts of dollars from the black market because the Bureau De Changes and banks are unable to meet their demands.
In his professional opinion, Idris Daud, a respected trader, forecasted the dollar to conclude the month at N1,750 per dollar and potentially reach the N1,800 threshold by the end of the year. Currently, the dollar is being traded within the range of N1,730 and N1,740, primarily by prominent foreign exchange black market dealers.
“The demand pressure now is high as more organizations are trying to import goods for the festive season in December and at the same time some are trying to restock before year end as they are not certain what the foreign exchange rate might be before the end of the year. This is another reason for the pressure.
“There is also less inflows of foreign exchange getting to our own end and we end up with little supply.
“I foresee the naira closing this month at N1,750 against the dollar and in the next three months at N1,800 per dollar on the back of continued pressure on demand and supply factor.”