Naira signals further depreciation amid rising oil price

Nigeria’s currency may fall further today as the opening rate signals 0.45 percent depreciation against dollar at the Investors and Exporters (I&E) forex window.
Data from the FMDQ indicates that dollar is currently trading at N397.17k, which is weaker than N395.38k quoted on Thursday morning.

The local currency on Thursday weakened further by 0.54 percent to close at N397.63k per dollar as against N395.50k on Wednesday at the I&E window, making the third depreciation in the week.

The depreciation was attributed to shortage of dollars amid strong demand by end users. The daily foreign exchange turnover declined by 9.26 percent to $47.72 million on Thursday from $52.59 million recorded on Wednesday, data from the FMDQ indicated.

The naira weakness is in spite of the rising price of oil, which reflects in external reserves accretion and gives the Central Bank of Nigeria (CBN) the firepower to defend the naira.
The price of Brent crude oil (petroleum), which has remained at about $40 per barrel last year, has risen to $51.11 per barrel as at 6.10 pm on Thursday, February 4, 2021.

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However, the oil price increase has not translated into accretion of the external reserves, as Nigeria’s foreign exchange reserves have declined by 0.90 percent in the last six days, data from the CBN show.
During the intraday trading, foreign exchange dealers maintained bid at between N390 and N399.50k.

The local currency steadied at N480 and N478 per dollar on the black market and Bureau De Change (BDC) segment of the FX market.
Aggregate foreign exchange inflow through the CBN stood at US$1.89 billion, a decrease of 22.0 per cent and 46.4 per cent below the levels in September 2020 and October 2019, respectively, according to the CBN’s economic report for October 2020.

This was attributed largely, to the 14.9 per cent and 39.6 per cent decrease in the non-oil and oil receipts through the regulator to US$1.47 billion and US$0.42 billion, respectively, in October 2020. The development was attributed to the low oil prices as well as the slow rate of recovery in most economies due, mostly, to the resurgence of COVID-19 in several countries globally, including the USA, Europe and the UK.

Aggregate foreign exchange outflow through the CBN increased by 22.8 per cent to US$2.35 billion in October 2020 from US$1.91 billion in the preceding month. The Apex bank continued its efforts to meet the foreign exchange demands arising from the increase in cross-border travel activities in the review period. A breakdown of the outflow through the CBN during the review period showed: interbank utilisation, US$1.56 billion; public sector/direct payment, US$0.31 billion; third party Market Dealers Association (MDA) transfers, US$0.21 billion; external debt service, US$0.08 billion; forex special payment, US$0.01 billion and drawings on Letters of Credit (L/Cs), US$0.03 billion.

The decline of 58.6 per cent in the drawings on L/Cs was attributed to the CBN’s policy on the cessation of third-party payments using Form M and introduction of Product Price Verification Mechanism to curb foreign exchange leakages through inflation of imports prices.