Nigeria’s currency, the naira, which has been on free fall for the past two years, depreciated further a day after the Central Bank of Nigeria (CBN) announced a currency redesign.
After trading on Thursday, the naira closed at N780 to the dollar, lower than N765 closed on Wednesday, which represented a 1.9 percent depreciation.
With the current rate, naira has depreciated by 27.56 percent compared to N565/$ at the beginning of the year.
Effective December 15, 2022, the CBN said it would redesign, produce, and circulate new series of banknotes at N100, N200, N500, and N1,000 levels, according to Godwin Emefiele, governor of the CBN, said in Abuja, Wednesday.
Following the policy announcement, analysts at Financial Derivatives Company (FDC) expect some initial speculation against the Naira but this should be short-lived.
“The Naira traded at N770/$ today (morning) but should settle at its true market value in the days ahead. In times of uncertainty, investors, speculators and manufacturers will prefer to be long in dollars and short in domestic currencies”, the analysts said in a report.
Responding to what will be the impact on the value of the naira in the forex market, the FCD said theoretically, it should have no effect whatsoever. But forex markets are usually a subject of panic and speculation. The first reaction to the new regulations is likely to be a flight to safety by investors, for example, anytime there is a major global market shakeout, investors scramble for gold and dump the U.S. dollar.
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Looking at the economic impact on inflation and GDP (output), the analysts said the change in the design of the currency notes will have no impact on the level of prices in the economy.
“Because inflation is defined in generic terms as a persistent increase in the general level of prices, this typically results from too much money chasing too few goods”, the report stated.
According to the report, since the economic value of the currency notes has not increased money supply, it will have no effect whatsoever on the general level of prices. However, to the extent that economic agents, especially market women in the middle of December will be constrained to exchange goods for a currency that will cease to be legal tender in 45 days. It could discourage them from accepting the old notes and therefore will reduce aggregate demand and affect the supply of goods. In other words, it could lead to a fall in GDP and output.
At the Investors and Exporters (I&E) forex window, naira remained unchanged at N441.67 per dollar, data from the FMDQ indicated.
Most foreign exchange dealers who participated in the FX auction on Wednesday maintained bids between N423.00 (low) and N447.00 (high) per dollar.
At the Nigerian Fixed Income Market, the Federal Government of Nigeria (FGN) bond secondary market traded on a bearish note on Thursday, with improved offers seen, especially on the long end of the curve. However, the market closed with few trades executed on the 23s, 27s and 37s due to limited bids to match offers, according to a report by Parthian Partners, Africa’s premier inter-dealer broker.
The report noted that treasury bills traded on a mixed note, though with a bearish bias. The session saw offers on the long end of the curve, albeit with a wide bid-offer spread.
“Nevertheless, we saw a sizable number of trades executed on the 14 Sept and 26 Oct NTB papers,” the analysts said.
The special bills papers experienced minimal activity in the market Thursday.
