Naira ends trading week with 1.85% loss to dollar

The foreign exchange market closed the trading week on Friday with Nigeria’s currency weakening by 1.85 percent as the dollar was sold for N495 on the black market compared to the opening rate of N486 per dollar.

Against the previous week closing rate, naira depreciated by 1.29 percentage points from 0.56 percent on May 21, 2021 on the same market.

The naira depreciation on the parallel market followed the adoption of the Nigerian Autonomous Foreign Exchange (NAFEX) rate of N410.25k as the official exchange rate by the Central Bank of Nigeria (CBN).

This was in response to the pressure from the International Monetary Fund (IMF) and the World Bank, which demanded exchange rates unification as a precondition for approval of $3.4 billion and $1.5 billion, respectively, loan request by the Nigerian government. Consequently, speculators took advantage of the CBN’s newly adopted exchange rate to buy up and hoard dollars.

The naira steadied at N486 per dollar on Tuesday and fell to N490 per dollar during the intraday trading on Wednesday. It further depreciated to N493 after trading on the same day.

The foreign exchange pressure continued on Thursday as Nigeria’s currency weakened further to N495 on the black market due to speculative activities of the operators.

With the closing rate on Thursday and Friday, naira was 0.40 percent lower than N493 per dollar closed on the previous day on the parallel market.

Naira also depreciated at the Bureau De Change (BDC) segment by 1.03 percent as the dollar sold for N490 on Thursday and Friday compared to the opening rate of N485 traded on Monday.

Nigeria’s currency on Monday weakened against the dollar by 0.41 percent at the BDC segment of the foreign exchange (FX) due to increased demand for the greenback by the end users.

READ ALSO: What CBN’s adoption of I&E FX rate means for Nigeria

After trading on Monday, the naira/dollar exchange rate closed at N485 as against N483 closed on Friday last week.

Over 5,000 BDC operators funded their accounts and received dollar disbursement by the CBN during the week. The CBN sells $10,000 twice weekly to BDC operators across the country.

Foreign exchange cash sales to BDC operators fell by 19.3 percent to US$0.42 billion in January 2021, according a report by the CBN.

At the Investors and Exporters (I&E) forex window or NAFEX, naira weakened by 0.18 percent to end the trading week on Friday at N412.00k per dollar compared to N411.25k/$, the opening rate of Monday.

The local currency depreciated by 0.06 percentage points Week-on-Week from 0.12 percent closed last week to 1.8 percent this week, data compiled by BusinessDay from the FMDQ indicated.

Naira gained by 0.18 percent on Monday as the dollar was quoted at N411.25k from N412.00k quoted on Friday last week at the I&E forex window, data from the FMDQ indicated.

On Tuesday, naira weakened marginally by 0.07 percent to N411.56k per dollar as against N411.25k closed on Monday at I&E window.

Naira appreciated marginally by N0.04k per dollar on Wednesday as against N411.56k quoted on Tuesday at the official market.

The local currency strengthened by 0.12 percent on Thursday as the dollar was quoted at N411.00k as against N411.50k on Wednesday at the I&E window, data from the FMDQ showed.

This week, Brent crude oil price rose 5.1% w/w to $69.76bbl as expectations that reopening economies and higher travel numbers in the US and Europe would boost fuel demand outweighed concerns about the coronavirus spread in parts of Asia.

On the domestic front, external reserves fell 0.3% w/w ($110.9m) to $34.3bn (5/26/2021) from $34.4bn last week, according to a report by Afrinvest Securities Limited.

At the FMDQ Securities Exchange (SE) FX Futures Contract Market, the total value of open contracts of the naira settled at $4.0bn, down 17.0% ($808.1m) from the prior week. This was due to the maturity of the MAY 2021 instrument despite new subscription in the JUN 2023 (contract price: N479.79) and DEC 2023 (contract price: N500.80) instruments.

The MAY 2022 (contract price: N436.48) instrument received the most buying interest in the week with additional subscription of $22.3m which took total value to $43.8m. On the other hand, the FEB 2022 instrument (contract price: N432.17) was the least subscribed, with an additional subscription of $5.0m for a total value of $481.1m.

“We expect rates would continue to trade within a tight band across different FX segments of the market in the coming week,” analysts at Afrinvest said.

During the week, precisely on Monday and Tuesday, after the Monetary Policy Committee (MPC) meeting, the CBN kept benchmark rates unchanged as it continues to wait out its previous policy measures to spur growth and rein in rising commodity prices.

Nigeria’s inflation rate marginally retreated for the first time in 19 months to 18.12 percent in April from 18.17 percent recorded in March 2021, according to the National Bureau of Statistics (NBS).

Reacting to the MPC’s decision, Razia Khan, managing director, Chief Economist, Africa and Middle East Global Research, Standard Chartered Bank, said the most important point to emerge from the CBN’s press conference was confirmation that the Investors and Exporters (I&E) rate was being used for official transactions. This is the rate now shown on the CBN website.

“Nigeria has a managed float,” she said.

She said the CBN’s statements confirm the effective harmonisation of the I&E and official FX rates, a key requirement for the unlocking of further donor financing (such as World Bank budget support). With the MPC having left all other parameters unchanged, she said it is not immediately clear if there are plans for even deeper FX market liberalisation. Given concerns about still-elevated inflation, with insecurity driving food price inflation, perhaps not.

However, the fiscal benefits of a now-confirmed official NGN devaluation to levels of about N410 are clear. Not only does this provide a boost to oil-related earnings in local currency terms, but Nigeria’s efforts to borrow externally will also be more favourably received as a result.

“Nonetheless, with a smoothly functioning FX market still a key requirement for improved growth, the extent to which FX liquidity on the I&E window improves will be closely monitored. The greater transparency of this window, with trades being recorded on a Reuters platform, is at least a step in the right direction. However, more remains to be done,” Khan said.