Naira pressure to continue on dollar scarcity, CBN demand policy

The pressure on the naira is expected to continue this week at the autonomous, Bureau De Change (BDC) segment and parallel market following dollar scarcity and dollar demand policy by the Central Bank of Nigeria (CBN).

The Bankers’ Committee meeting on Thursday reached a consensus with the CBN and deposit money banks (DMBs) that demand for foreign exchange would only be met for development of the real sector.

Consequently, exchange rate at the BDC segment opened last week at N307/$ on Monday and depreciated N2 by mid-week. On Thursday, rates spiked to N317/$ and N325/$1 at the BDC and parallel markets, respectively.

Media reports also quoted the CBN director of Banking Supervision as saying 15 percent of forex demand stemmed from school fees and medical bills payment purposes, and urged Nigerians to begin to look inwards. We suspect these reports may have fuelled speculative hoarding of FX in anticipation of further restrictions, hence the spike in the BDC and parallel market rates.

“We expect to see more volatility in the non-official segments as the CBN remains unwavering in its current exchange rate policy,” Ayodeji Ebo, head, investment research, and his team of analysts at Afrinvest Securities Limited, said.

In line with recent trend observed in the Nigerian foreign exchange market, forex illiquidity has continued to see exchange rate depreciate at the less-regulated segments (BDC and parallel markets), as demand remains atop supply.

Interbank liquidity declined by as much as N580 billion on Tuesday, after banks made provisions for a CBN currency auction held on Thursday. The official (CBN) and interbank rates have remained stable at N197/$ and N199.10/$1, respectively, due to the subsisting fixed exchange rate policy of the CBN, while the spread between the official and the less regulated segments continue to widen.

At the money market last week, the financial system opened the week with a high level of liquidity (N996bn) due to refunds made last Friday for unutilised naira liquidity provided by the DMBs for the CBN’s weekly forex intervention held last Thursday. Consequently, OBB (Open Buy Back) and O/N (Overnight) rates closed flat at 0.7 percent and 1 percent, respectively.

However, as DMBs made provisions for the CBN FX intervention auction for last week, money market rates increased on Tuesday with OBB closing at 2.4 percent and O/N at 3 percent.

Consequent on maturity of OMO bills worth N268 billion that raised system liquidity on Thursday, money market rates dropped to 0.6 percent and 1 percent for the OBB and O/N, respectively, while NIBOR rates closed at an average of 7.4 percent.

Interbank rates dropped further on Friday, after refunds were made for unfulfilled bids at the currency intervention auction with the OBB and average NIBOR rates, closing at 0.5 percent and 7.3 percent, respectively, while the O/N rate was flat at 1 percent. We expect the wide swing in interbank rates to continue next week, dictated by FX intervention provision and refund as well as T-bills maturity of N142.4 billion and auction of the same amount.

Hope Moses-Ashike