Official reports gathered from Nairametrics on Wednesday, July 14, noted that Nigeria’s naira had further weakened against the US dollar at the official window.
On Tuesday, July 13, Nigeria’s official exchange rate at the Investors and Exporters (I&E) window closed at N411.75/$1. This fall reported signifies a 0.06% decline compared with the previous day’s rate, which closed at N411.5/$1.
The I&E window was introduced initially in 2017 following the oil price crash in 2016. The introduction of the FX window was to support individuals and businesses that needed foreign currency to repay loans, dividends, make trade transactions and settlements, and repatriate capital.
In a circular dated April 24, 2017, FMDQOTC maintained, “This Market Notice is issued pursuant to the Central Bank of Nigeria (“CBN”) circular dated April 21, 2017 (Ref: FMD/DIRCIR/GEN/08/007) and titled Establishment of Investors’ and Exporters’ FX Window which provides in clause 4.0 that in order to support appropriate benchmarking and facilitate derivatives activities in the newly established Investors’ and Exporters’ FX Window (the “Window”), FMDQ OTC Securities Exchange (“FMDQ”) will be developing and publishing a new fixing called NAFEX – the Nigerian Autonomous Foreign Exchange Rate Fixing”.
The circular further noted, “NAFEX is the FMDQ reference rate for foreign exchange (“FX”) activities in the Investors’ and Exporters’ FX Window and is designed to represent Spot FX market rates in the window. NAFEX rates will be generated independently and objectively and published every business day at 12 noon or at a time advised by FMDQ.”
In May 2021, the CBN ditched the decade-long government-determined official exchange rate and adopted the Nigerian Autonomous Foreign Exchange Rate (NAFEX), also known as the I&E benchmark. This rate, which was set at N410.25/$1, is now reported to have depreciated to N411.75/$1, causing the naira to bow once more.
This fall in naira value is traceable to funding inadequacies in the foreign exchange market, leading to the scarcity of the same. Also, sustained demand and overdependence of over 200 million Nigerians on foreign imported goods further worsens the situation as scarce liquidity always occasions higher prices.
This is the simple explanation for the imported inflation and currency depreciation challenges that the country currently battles with.
From the parallel market window, some naira stability is recorded as the local currency exchanged with the US dollar at N505/$1, just as was observed four days before.
Within the observed date, the intra-day trading rate at the I&E window on Tuesday, July 13, stood at N412/$1, the highest recorded for that day, and traded at an all-day low at N400/$1 on the same day. However, foreign exchange turnover for that day fell, according to FMDQ data, to $116.15 million on Tuesday, July 13, from $178.13 million the previous day.
The country’s external reserve also took a hit on Monday, July 12, as it fell by $11.79 million on that day, to close at $33.09 billion. This decline may be explained by the downward trend exhibited by global crude oil prices, which went bearish on Tuesday, July 13.
WTI crude fell by 0.13% to close at $75.15pb, while Bonny Light also trended southwards by 0.6% to close at $74.16pb. Brent crude, however, recorded a gain at 1.77% and closed at $76.49pb the same Tuesday.
Environmental Investigation Agency (EIA) has predicted that oil prices may remain explosive pending when OPEC+’s production policy become clear.
Nigeria’s foreign exchange reserve position remains largely troubled, despite a post-pandemic recovery of global oil prices and increased production and distribution activities in the sector. Huge trade deficits and sluggish foreign capital inflows account for the sustained current account deficit experienced, and this has been so for nine consecutive quarters, according to Nairametrics.
Admittedly, Nigeria’s current effort to boost its reserves is unquestionably not enough, and if not adequately addressed, the country may soon drink from the same cup that Zimbabwe drank from in 2007-2009.
Regaining the integrity of the Nigerian naira and lifting millions of Nigerians out of poverty will require much from the government. It will require shifting the country from a mono-product economy to one which is well spread across varied productive sectors. Expanding Nigeria’s production architecture within existing sectors and creating room for other potential forward-looking markets is essential to redefining the country’s fiscal destiny while promoting the cause for a competitive exchange rate market.
Unfiltered exposure to risks from the rest of the world is one of Nigeria’s main challenges. Also, the absence of a well-diversified and galvanised economy or the lack of ability to fashion out one has kept Nigeria perpetually at the mercy of her global counterparts. Over-reliance on oil rents have kept the economy bare and vulnerable to supply impulses. All these weigh heavy on the country’s currency strength.
The strong connection between exchange rate and economic buoyancy cannot be overemphasised. When naira value continues to decline, the country will keep suffering high import costs, and all sectors that depend on imported intermediate goods will suffer. Hence, a market-determined exchange rate is necessary to smoothen out supply and price imbalances while giving way for opportunities to boost output growth and drive industrialisation and trade.
