Naira appreciated further against the US currency at the official foreign exchange (FX) market, despite an 18.90 percent drop in dollar liquidity on Tuesday.
At the close of trading on Tuesday, naira gained 4.90 percent as the dollar was quoted at N844.85 compared to N888.35 quoted on the previous day at the Nigerian Autonomous Foreign Exchange Market (NAFEM), data from the FMDQ showed.
Willing buyers and willing sellers quoted the dollar at a spot rate of N1,189.12, stronger than N1,249 spot rate of Monday. The lower bid rate on the spot trading remained at N720 per dollar.
The daily foreign exchange market turnover, which reflects the volume of dollar transactions at the official market, declined by 18.90 percent to $111.76 million on Tuesday from $137.82 million recorded on Monday.
A low FX supply usually leads to a depreciation of the Nigerian naira against the dollar. This is because the value of fewer dollars available, increases relative to the naira. This makes imports more expensive, putting upward pressure on inflation.
A weaker naira discourages foreign investors, who may find it less profitable to invest in Nigeria. This can lead to reduced foreign direct investment, which is crucial for economic growth and development. Additionally, local businesses may struggle to access foreign exchange needed for importing critical raw materials and equipment, hampering production and economic activity.
The combination of expensive imports and lower economic activity can lead to increased inflation, which erodes household purchasing power, as wages may not keep pace with rising prices. This can lead to increased poverty and social unrest.
A low dollar supply can also put pressure on the Nigerian financial sector. Banks and other financial institutions may struggle to meet their dollar obligations, leading to liquidity problems and instability. This can have a ripple effect throughout the economy, impacting lending and borrowing activities.