Naira, Nigeria’s legal tender, lost 3.8 percent of its value against the dollar in last month.
It fell from N737/$ at the beginning of the year to close February at N755/$, at the parallel market, also known as black market.
This was fueled by heightened uncertainty as naira cash crunch worsened, according to Bismarck Rewane, managing director/chief executive officer of Financial Derivatives Company Limited in a new report.
The report noted that exchange rates at the Investors and Exporters (I&E) forex window steadied at N462/$ in January and February
“Official exchange rate remains overvalued,” said Rewane.
On Tuesday, the naira appreciated across foreign exchange market as demand for dollars moderated.
The Naira strengthened by 0.05 percent as the dollar was quoted at N461.42 on Tuesday as against the last close of N461.67 on Monday at the I&E window, Nigeria’s official market, data from the FMDQ indicated.
Most foreign exchange dealers who participated in the market auction on Tuesday maintained bids between N446.00 (low) and N462.18 (high) per dollar.
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At the parallel market, the local currency gained 0.4 percent as the dollar traded at N750/$ on Tuesday compared to N753 on Monday.
According to Rewane, Nigeria’s sources of foreign exchange remain weak due to sub-optimal oil production induced by oil theft, capital flow reversal owing to global monetary tightening and exchange rate premium at the parallel market.
He defined exchange rate management as the use of official policies to influence the exchange rate in the forex market.
Nigeria’s exchange rate management includes managed floating exchange rate, introduction of foreign exchange window for investors and auctions apart from the official window.
Going through the history of exchange rate adjustments in Nigeria, he said the parallel market rates deviated further from
official rate when forex restrictions were imposed, fuelled inflation and led to sub-optimal Gross Domestic Product (GDP) growth rate.
He said Nigeria’s GDP growth rate was below an average of 7 percent between 2006-2011.”Exchange rate management is key to boosting growth in Nigeria.”
The report made reference to Egypt, which adjusted its currency in November 2016, to unify rates at the parallel and the official markets and this led to a sharp rise in inflation rate by 30 percent.
The country’s devaluation was complemented with tight monetary and fiscal policies to reduce liquidity build-up, consequently, inflation dropped back to single digit, forex demand backlog was cleared and reserve accrued to $45 billion in 2019.
Chinwe Egwim, chief economist and head of economic research at Coronation Merchant Bank, said it is unclear if the Bola Ahmed Tinubu, President elect’s administration would prefer a floating exchange rate regime, but the manifesto states that “the
exchange rate cannot be ignored nor left to the whims of the market”.
She said healthy accretion in external reserves should be recorded by the end of 2024 which would support foreign exchange liquidity and give the Central Bank of Nigeria more room to defend the naira.
