Nigeria’s foreign exchange market is in a perfect storm, and the naira may depreciate to as low as 750 against the dollar at the parallel market, Bismarck Rewane, managing director of Financial Derivatives Company, has said.
“Naira [is] likely to depreciate towards N750/$ before a major correction,” Rewane said in his presentation at this month’s edition of LBS Breakfast meeting.
He said the ability of the Central Bank of Nigeria (CBN) to defend the naira will be affected by the decline in external reserves.
The country’s external reserves, which gives the CBN the firepower to defend the naira, declined to $38.10 billion on October 5, 2022 from $40.50 at the end of last year, according to data obtained from the apex bank.
Sources of forex inflows into the country are oil revenue, non-oil exports, foreign direct investment, foreign portfolio investment and diaspora remittances.
“Nigerian forex market is in a perfect storm; a major source of forex inflows falling,” said Rewane.
The country’s oil production is down to 1.1 million barrels per day (below OPEC quota of 1.8 million bpd), and oil theft estimated at 400,000bpd, he said. Oil prices fell by 33 percent in the last three months.
Rewane said non-oil exports were down 5.61 percent to $675.08 million in the second quarter of 2022 from $715.19 million in the first quarter.
He added that foreign direct investment declined by 5.02 percent in Q2 to $147.16 million from $154.97 million in Q1, while foreign portfolio investment fell by 20.91 percent to $757.32 million in Q2 from $957.56 million in Q1.
He highlighted the impact of exchange rate market structure failure on the economy, saying that naira depreciation was a major factor stoking inflation.
Dollar scarcity is fuelling smuggling of fertiliser bags to other countries, leading to spike in fertiliser prices, limiting local use of fertilisers and resulting in lower agricultural output, he said.
“The spate of oil theft and the associated leakages of government revenue is very troubling. Billions of dollars have been lost to this apparent failure of security effectiveness in the oil producing areas,” said Muda Yusuf, CEO/founder of Centre for Promotion of Private Enterprise.
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He said persistent importation of petroleum products had continued to put pressure on foreign reserves, weakening the capacity of the CBN to support the forex market.
“Naira continues to depreciate against major foreign currencies because the demand for forex exceeds the supply both in respect of oil and non-oil sectors,” said Taiwo Oyedele, head of tax and corporate advisory services at PwC.
According to Yusuf, there is a need for urgent steps to be taken to ensure a better macroeconomic management framework to stabilise the exchange rate, eradicate the challenge of illiquidity in the forex market and to stem the current depreciation of the naira.
He stressed the need for urgent reforms in the forex market with greater focus on supply side strategy.
“There is a need to review the current disproportionate emphasis on demand management of the foreign exchange market. Most sectors are experiencing serious disruptions and dislocations because of the current foreign exchange policy regime,” he said.
The naira closed unchanged at N735 per dollar at the parallel market on Friday as demand slowed.
However, the local currency strengthened at the Investors and Exporters (I&E) FX Window on Thursday on the back of improved liquidity.
After trading on Thursday, the dollar was quoted at N436.63/$ at the I&E window, compared to N437.50 quoted on the previous day, data from the FMDQ indicated.
