Naira gains 26.24% in one week despite external reserves decline

The naira gained 26.24 percent against the dollar in the parallel market last week, despite the decline in the country’s external reserves.

The dollar was quoted at N705 on Friday at the black market, compared to N890 a week earlier.

The naira appreciated last week after losing 36.52 percent of its value in 11 months on the black market from N565/$1 at the beginning of the year.

The local currency appreciation followed low demand amid an increased supply of dollars in the market, resulting in losses for some speculators.

“I am selling at a loss; I bought at the rate of N760 per dollar. I can sell to you at N710/$; let me lose N50/$,” one trader told BusinessDay.

An appreciation in the parallel market rate will increase exchange rate convergence, reduce parallel market premium and rent-seeking activities and improve market efficiency and diaspora inflows, according to Bismarck Rewane, managing director/chief executive officer of Financial Derivatives Company Limited.

“Despite several initiatives by the Central Bank of Nigeria (CBN) such as the RT200 programme, the increase in interest rates, clamping down on Bureau De Change, and FX repatriation policies, the naira vis-à-vis the dollar keeps depreciating,” analysts at FSDH said in a new report.

The report said the recent policy on issuance of new naira notes had also intensified the currency’s depreciation.

“While the underlining problem with Nigeria’s exchange rate is limited FX inflows, we believe that policies by the apex are important tools that influence the movement of the naira.”

“The naira is grossly overvalued in the official market,” said Rewane. The naira is 20 percent overvalued, and the redesign of the currency notes is no solution to overvaluation, he added.

According to him, Nigeria’s balance of trade is under pressure, and the foreign exchange market structure is inefficient.

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The CBN recently announced plans to introduce new banknotes to replace the current N200, N500 and N1,000 Notes with effect from December 15, 2022.

Nigeria’s gross official reserves declined by $866 million to $37.4 billion in October, data from the CBN show.

The level of attrition is the second highest since May of this year and follows a decrease of $772 million in September, according to a new report by FBNQuest.

“The sharp drop in the FX reserves is mostly due to the CBN’s increased interventions on the various FX windows, such as the investors and exporters, and the Secondary Market Intervention Sales windows, following the difficulties with FX supply,” it said.

The report said despite the high level of crude oil prices, the external reserves have seen very little accretion from oil sales this year, due to the sector’s low productivity as a result of large-scale crude oil theft.

According to OPEC data obtained from secondary sources, Nigeria’s oil output (excluding condensates) increased marginally to about 1.09 million barrels per day (mbpd) in September 2022, from 1.06mbpd in August, far below potential output of over 2mbpd.

FBNQuest said foreign direct investment and foreign portfolio investment inflows have been very limited on account of tough financial market conditions due to monetary policy tightening by global central banks.

It said: “Another significant factor responsible for the dwindling capital inflow is the relative over-valuation of the naira on the official Nigerian Autonomous Foreign Exchange Fixing window relative to the USD and other major currencies, the report stated.

The report said the naira has depreciated by about 5 percent year-to-date on the official window. “This contrasts with a depreciation of about 9 percent for the South African Rand and almost 35 percent for the Egyptian Pound.”

According to FBNQuest, the Egyptian Pound’s sharp depreciation is a result of two devaluations this year, with the most recent in October reflecting the currency’s floating.

It said following the move, the country agreed on a $3bn loan from the International Monetary Fund, with at least $5bn more to come from its international partners, according to Bloomberg.

“Total reserves for Nigeria as at end-October covered 8.5 months of merchandise imports based on the balance of payments for the 12 months to June 2022, and 6.5 months when we add services,” FBNQuest said. “If the present attrition rate continues, Nigeria’s foreign exchange reserves will probably fall to a little under $36 billion by the end of December.”