Naira on Tuesday fell to a record low of N725 per dollar at the parallel market following increased demand for the greenback amid a supply shortage.
After trading on Tuesday, the local currency lost N3 or 0.41 percent of its value to close at N725/$ compared to N722 closed on Monday on the black market, BusinessDay findings show.
However, the trend is expected to reverse following the tightening policy measures of the Central Bank of Nigeria (CBN), according to traders who spoke with BusinessDay.
Godwin Emefiele, governor of the CBN, after the Monetary Policy Committee (MPC) meeting in Abuja on Tuesday, raised its benchmark interest rate, known as Monetary Policy Rate (MPR) to 15.5 Percent, the third consecutive hike this year.
The CBN also increased the Cash Reserve Ratio (CRR) by 500 basis points to 32.5 percent from 27.5 percent in January 2020, to reduce monetary-induced inflation.
Emefiele had in July 2022 MPC meeting warned bank customers against converting the naira to foreign exchange, for electioneering purposes.
Osita Nwanisobi, director, the corporate communications department, on July 20, 2022, clarified the CBN governor’s warning on converting Naira to dollar for the electioneering campaign.
According to Nwanisobi, the warning by the CBN Governor was to those who sought to convert the Naira from their accounts into foreign exchange for election campaigns and not those who seek to exchange the currency for legitimate purposes such as payment for tuition and other personal expenses.
While maintaining that the Bank, in line with its mandate, had discretionary power to prevent persons from conducting unauthorized transactions, Nwanisobi said the CBN was within its statutory limits to mop up the excess liquidity in the vaults of the institutions it regulates, so they do not get involved in speculative activities.
With the new increase in CRR, the CBN may likely debt banks a whopping N15.8 trillion, being 32.5 percent of N48.64 trillion, their combined deposit base.
“It remains to be seen if the policy rate hikes will attract forex liquidity and therefore strengthen the Naira against other major currencies,” said Taiwo Oyedele, head of tax and corporate advisory services at PwC.
Reacting to the CBN’s policy decision, Uche Uwaleke, professor of Capital Market at the Nasarawa State University Keffi, said, “I think the decision by the MPC to further tighten monetary policy is justified by the need to tame inflationary and forex pressures and possibly stem capital outflows on account of the hike in policy rates in developed economies, especially in the US and UK. The primary mandate of the CBN is to maintain price stability.”
He said it has grave implications for cost of capital for firms, cost of borrowing by the government, stock market performance and output growth in general. It may also affect the asset quality of banks as they reprice their loans in response to the hike in MPR.
On the CRR hike Uwaleke said, “It reinforces the hike in MPR aimed at squeezing liquidity in the Banking system, reducing the ability of banks to give loans and raising interest rates in the process. The MPC believes that the expansion in broad money supply is a threat to inflation.”
At the Investors and Exporters (I&E) forex window, Naira depreciated by 0.08 percent as the dollar was quoted at N436.33 on Tuesday compared to N436.00 quoted on Monday. Most currency dealers who participated at the foreign exchange market auction on Tuesday maintained bids between N423.00 (low) and N441.00 (high) per dollar.