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BusinessDay

Naira sinks further as oil, external reserves fall

Explainer: How to prepare for naira devaluation and what it means for Nigerians

The Naira hit a new low of N760 to the dollar at the parallel market Monday, on the back of declining foreign direct investment and external reserves.

The scarcity of foreign exchange and policies on FX repatriation continue to limit FX inflows into the country, according to analysts at FSDH Research.

The naira has been on a free fall as a result of rising strong dollar, import demand, oil theft, fuel subsidies, currency speculation, record high money supply and weak productivity, analysts have said.

Oil prices slid on Monday after Chinese data showed that demand from the world’s largest crude importer remained lacklustre in September as strict COVID-19 policies and fuel export curbs depressed consumption, Reuters reported.

Brent crude futures for December settlement were down $1.17, or 1.3 percent, at $92.33 a barrel by 1217 GMT, after rising 2 percent last week. US West Texas Intermediate crude for December delivery was at $83.65 a barrel, down $1.40, or 1.7 percent.

Nigeria’s external reserves, which give the Central Bank of Nigeria (CBN) the muscle to defend the naira, have declined by 6.96 percent year-to-date to $37.68 billion as of October 20, 2022 compared to $40.5 billion recorded at the beginning of the year, data from the CBN show.

On a month-on-month basis, the external reserves of Africa’s most populous country declined by 2.23 percent from $38.54 billion recorded on September 20, 2022.

Bismarck Rewane, managing director/chief executive officer of Financial Derivatives Company Limited, said the Nigerian FX market reflects a price discriminatory monopoly with different prices for the same commodity.

The four exchange rate windows include the Investors’ and Exporters’ FX window, also known as the Nigerian Autonomous Foreign Exchange Fixing, where dollar is being quoted at over N400/$; retail auction segment where the dollar is quoted at N452.50/$; International Air Transport Association, N438; and parallel market.

In his presentation at the Lagos Business School this month, Rewane highlighted some events that resulted in distortion in the foreign exchange.

These include eradication of abokiFX, a website that used to track black market rates; lack of perfect information, multiple exchange rate, heterogeneity of the product, and discontinued sales of FX to the Bureau De Change (BDC), all leading to arbitrage and loss of confidence in the currency, he said.

Rewane projected that naira would depreciate to N750 per dollar as major sources of dollar inflows are declining. Sources of dollar inflows are oil revenue, non-oil exports, foreign direct investment, foreign portfolio investment and diaspora remittances.

The CBN increased dollar sales to banks by over 200 percent last year, in fulfilment of its promise made on July 27, 2021 when it discontinued foreign exchange supplies to the BDCs.

However, due shortage of dollars caused by rising demand pressure, the apex bank has cut dollar sales to banks, a Lagos-based investment banker said.

Godwin Emefiele, governor of the CBN, during a press conference after the Bankers’ Committee meeting in February 2022, hinted of the imminent stoppage of dollar sales to banks.

Meanwhile, while some deposit money banks have reviewed down their international spend limit to $20 per month from $100 per month, others have temporarily suspended the usage of naira cards abroad.

“The political season is expected to compound the situation especially in relation to the demand for foreign currency. Also, due to the current uncertainty around the economy, there is a growing demand for the dollar to hedge against further depreciation of the naira,” FSDH said in a report.

“We recognise some CBN interventions as they show signs of supporting foreign exchange inflows, especially the ‘Race to $200 billion in FX Repatriation (RT200 FX Programme)’ initiative. But then, the outcomes are far-fetched from matching the demand for foreign exchange. This is because there is still no clear-cut and effective footprint to drive output expansion across sectors for exports.”

Launched on February 10, 2022 by the apex bank, the RT200 FX programme was designed to reduce the excessive pressure on the exchange rate and to increase FX inflows.