Foreign exchange sales to authorised dealers by the Central Bank of Nigeria (CBN) have declined in recent months, fuelling dollar scarcity and naira depreciation across FX markets.
The naira has been on a free fall in recent weeks, depreciating to an all-time low of N843 per dollar on Wednesday at the parallel market.
At the Investors and Exporters (I&E) forex window, the naira depreciated by 0.68 percent as the dollar was quoted at N446.00 on Tuesday as against the last close of N443.00 on Monday, data from the FMDQ indicated.
Data from the CBN show that FX sales to the authorised dealers decreased by 1.02 percent quarter-on-quarter to $4.81 billion in the second quarter of 2022 compared to $4.86 billion in the first quarter.
The development followed a decline in major sources of dollar inflows. Sources of dollar inflows are oil revenue, non-oil exports, foreign direct investment, foreign portfolio investment and Diaspora remittances.
The oil market got a breather from monthly losses since June after recording a 9.0 percent gain to $92.81 per barrel in October 2022, according to a monthly report by Afrinvest Securities Limited.
Nigeria’s external reserves sustained a downward trend last month, down by 2.1 percent to $37.4 billion as of October 28, 2022.
“This reiterates Nigeria’s weakness in increasing its reserves from oil price accretion,” analysts at Afrinvest said.
In terms of flows to the I&E forex window, total net inflows stood at $46.9 million in October from $86.7 million in September 2022.
The market recorded net outflows of $83.1 million from exporters, foreign portfolio investments at $10.6 million and individuals at $3.1 million, while non-bank corporates saw net inflows of $91.1 million, the CBN at $39.9 million, other corporates at $9.5 million and foreign direct investment at $3.2 million, the report noted.
CBN’s quarterly report shows that Small and Medium Enterprise interventions and sales at the I&E window declined by 8.6 percent and 41.3 per cent to $0.34 billion and $0.83 billion, respectively, relative to the preceding quarter.
However, interbank/invisibles and Retail Secondary Market Intervention Sales windows, increased by 5.3 per cent and 14.7 per cent to $0.48 billion and $2.05 billion, compared with the amounts in the preceding quarter.
The CBN last week announced plans to introduce new banknotes to replace the current N200, N500 and N1,000 notes with effect from December 15, 2022.
“CBN reduced supply has led to dollar scarcity as well as speculative activity… And hence further depreciation in the Naira. I don’t think the naira redesign has anything to do with it. FX scarcity is also due to fall in oil revenues,” a Lagos-based investment banker said.
Taiwo Oyedele, head of tax and corporate advisory services at PwC, said the CBN certainly has limited ability to supply the required foreign exchange to meet the rising demand, some of which is speculative or illicit.
According to him, the recent announcement of naira redesign has only made what was a bad situation even worse as the naira has continued to depreciate significantly against major foreign currencies in both the official and parallel markets.
Read also: Naira heads to N1,000 per dollar as scarcity worsens
“Unfortunately many importers source the bulk of their forex needs from the parallel market including manufacturers. This will have a pass through effect on inflation with an upward pressure in the coming months,” he said.
Reacting to the development, Aminu Gwadabe, national president of the Association of Bureau De Change of Nigeria, said the lingering paucity of liquidity in the critical retail sector of the foreign exchange market have continued to be unabated even before the announcement of the new naira redesign policy.
The root causes, according to him, are legacy factors including dwindling buffers, debt service burden, external balance of payment deficits, lower earnings and illegal economic behaviours like currency hoarding, currency substitution, insecurity , and election spending, which have continued to exert negative pressure on the fragile local currency.
He said: “The naira redesign is an orthodox strategy aimed at curbing the twin challenges of inflation, exchange rate volatility resulting in the loss of value of our local currency and pervasive insecurity in the system. It is therefore a misnomer to see the policy as the focal point for our continued currency attrition.
“I see the movement in the exchange rate as artificial, speculative and not an effective rate that the burble will burst. With the capacity of the CBN and their resilience including the security agencies, I believe it is going to be temporary and we will begin to discover the true clearance market rate in the system.”
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