The value of Nigeria’s currency, naira, is projected to strengthen to N680 per dollar this year, according to Bismarck Rewane, managing director/chief executive officer of Financial Derivatives Company Limited.
Currently, naira is being exchanged with the dollar at the rate of N743/$1 as at Monday, January 9, 2023 at the parallel market also known as the black market.
“In 2023, exchange rate adjustment is inevitable,” said Rewane in his monthly presentation for December 2022, titled, ‘An Odd Year that Feels Like a Leap Year’.
He said the exchange rate adjustment will narrow the gap between the Investors and Exporters (I&E) forex (I&E FX) and the parallel market.
The gap between the naira/dollar exchange rate at the official and parallel market of the foreign exchange has continued to widen due to demand pressure.
The naira closed at the rate of N743 per dollar at the parallel market on Monday, while at the official market, dollars was quoted unchanged at N461.67. This shows a gap of N281.33 per dollar between the two markets.
According to Rewane, the more the administrative controls in the forex market, the more the parallel market premium increases leading to diversion of investment flows away from the market.
Nigeria’s external reserves, which give the Central Bank of Nigeria (CBN) the firepower to defend the naira, plummeted to $36.96 billion in December 2022 from its all-time high of $62.08 billion in 2008, he noted.
External reserves were under pressure due to declining capital inflows, which was down to $3.1bn in the first quarter of 2022 (H1’22) from $24.0bn in full year (FY) 2019, as well as shortfall in Diaspora remittances that fell to $10.1bn (H1’22) from $23.8bn in FY2019.
Foreign exchange reserves declined by 8.44 percent year-on-year to 37.08 billion as of December 30, 2022 from $40.50 billion recorded at the beginning of 2022, data from the CBN indicated.
Godwin Emefiele, governor of the Central Bank, had in November 2022 said the official foreign exchange receipt from crude oil sales into Nigeria’s official reserves has dried up steadily from above $3.0 billion monthly in 2014 to an absolute zero dollar.
He noted that the Nigerian foreign exchange market was in the middle of a serious crunch which was straining the reserves and stifling the value of the naira.
Total reserves as at the end of December 2022 covered 8.4 months of merchandise imports on the basis of the balance of payments for the 12 months to June 2022, and 6.4 months when added services.
However, “for a more accurate picture, we must adjust the gross reserve figure (and the import cover) for the pipeline of delayed external payments,” the analysts at FBNQuest said.
According to a report by FBNQuest, despite the demand pressure on the naira exchange rate, the CBN was able to keep the naira relatively stable on the official market. This was mostly accomplished by means of FX supply rationing.
The naira lost just about nine percent of its value against the US dollar last year, despite the US Federal Reserve’s significant interest rate rises. This is in contrast to the performance of most other currencies around the world, the report stated.
“Currency pressures will linger as high global interest rates continue to stem capital inflows,” said Rewane, adding that export promotion would strengthen the naira as promised by Ahmed Tinubu, presidential candidate of APC.