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The naira experienced a significant depreciation in the foreign exchange (FX) market due to heightened demand for the US dollar to support economic activities in Nigeria. The exchange rate further deteriorated in the official FX market on Thursday, coinciding with a continued decline in Nigeria’s gross external reserves, which have now recorded 10 consecutive outflows.
As of August 7, 2024, the external reserves balance had dropped to $36.453 billion, a decline of $419 million from the previous balance of $36.872 billion. Despite the Central Bank of Nigeria (CBN) reporting record-high FX inflows in July, the situation in the official currency market remains challenging.
The ongoing scarcity of foreign exchange has kept the naira under pressure, fluctuating between N1500 and N1600 per US dollar. Authorities have described the naira as being significantly undervalued. In July, the naira depreciated by 6.9% in the Nigerian Autonomous Foreign Exchange (NAFEX) window, reaching an exchange rate of N1,608.70 per US dollar, primarily due to sporadic FX sales to authorized dealer banks.
“The issue isn’t just with the naira; there’s a fundamental dislocation in Nigeria’s economic structure,” analysts commented during a discussion with MarketForces Africa on Thursday. Nigeria’s heavy reliance on hydrocarbon sales to bolster foreign reserves, coupled with fluctuating net inflows from international trade, has exacerbated the currency’s struggles.
Following recent FX reforms, the disparity between the official and parallel market exchange rates has narrowed, reducing speculative activities in the FX market. Analysts attribute this development to the CBN’s efforts to unify exchange rates.
According to data from the FMDQ platform, the naira depreciated by 2.74%, closing at ₦1,586.11 per US dollar. This weakening of the local currency is attributed to the high demand for foreign currency, which remains scarce in the market.
Amid growing concerns about the naira’s ability to retain its value, some Nigerians, businesses, and even government entities have shown a preference for conducting local transactions in foreign currency. Meanwhile, the naira remained stable at ₦1,600 per US dollar in the parallel market on Thursday.
In the informal currency market, demand for foreign currency was relatively low, allowing Bureau de Change operators to manage the situation. On the global commodities front, oil prices saw a rebound. MarketForces Africa reported that crude oil prices, which had previously lost most of their yearly gains, were on the rise due to weakened demand in China and concerns about the U.S. economy.
ICE Brent prices increased by 1.72%, reaching $77.36 per barrel, while US WTI prices rose by 1.75% to $73.19 per barrel. Meanwhile, gold prices declined by 1.13%, settling at $2,518.70 per ounce.
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