• Thursday, May 23, 2024
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BusinessDay

Naira poised for worst four-day drop since January’s devaluation

Naira extends depreciation to 1,515/$ despite marginal growth in external reserves

Nigeria’s currency plunged, heading for its worst four-day losing streak since the naira was devalued in January as domestic dollar liquidity evaporated.

The naira dropped 5.3% against the dollar on Tuesday paring the month’s gains to 15%, which still makes it the best-performing among currencies monitored by Bloomberg.

On the unofficial market, it fell 0.2% to extend the retreat of the past four trading days to 17%, said Abubakar Muhammed, chief executive of Forward Marketing Bureau de Change Ltd., which tracks the data in the commercial capital.

Supply of dollars is proving to be insufficient to support the central bank’s resolve to boost confidence in the naira. The Central Bank of Nigeria has raised rates 600 basis points this year to fight inflation. Volumes in the foreign-exchange market dropped to a two-month low of $86 million on Friday before recovering to $133 million on Tuesday.

Nigeria’s gross dollar reserves stood at $32 billion as of April 22, dropping 29% in five years, according to Bloomberg’s calculations based on the latest available data from the Central Bank of Nigeria.

The reserves, which declined for 17 straight days before seeing a marginal increase on Monday indicate that dollar inflows are not arriving quickly enough to rebuild the assets after the central bank settled overdue foreign currency obligations earlier this year.

“The naira has been supported by onshore dollar selling as long positions were unwound, but the rally was probably overextended,” said Samir Gadio, head of Africa strategy at Standard Chartered Bank. “A dislocation started to emerge as domestic market participants sold dollars at increasingly lower spot levels” which was not sustainable and led to a correction, he said.

The naira has lost more than 60% of its value against the dollar since June after two devaluations aimed at allowing the currency to float more freely to attract more foreign capital. The central bank has also introduced a raft of measures to prod lenders to supply more dollars to the local market.

The steps have helped the naira to recover from a 1,627 per dollar low in early March to 1,300 on Tuesday on the official market – the most recent day for which data are available.

The central bank on Tuesday offered dollars to operators of bureau de change at 1,021 naira, 21% below the official rate tracked by FMDQ, in a bid to improve liquidity in the parallel market.

“If the central bank is driving appreciation by selling dollars to BDCs at a lower rate, then I’m not sure how sustainable that is,” said Banctrust Investment Bank’s analyst Ayodeji Dawodu, who predicts the naira will probably stabilise around 1,500 a dollar by year end, adding that this would spur strong foreign capital inflows.