Nigeria: Naira Depreciates as Official and Parallel Market FX Rates Converge

The Nigerian naira experienced a depreciation of 0.77% against the US dollar, closing at N1,606.56 in the official market on Wednesday. This decline is largely attributed to strong demand for foreign currency, which continues to strain the supply of foreign exchange (FX) in the market.

The convergence of official and parallel market rates today suggests that the naira may not be as undervalued as previously asserted by the Central Bank of Nigeria (CBN). This alignment indicates ongoing challenges within the FX market, particularly the persistent liquidity issues that have contributed to the naira’s depreciation across both official and informal currency markets.

Despite the recent devaluation of the naira as part of broader FX reforms, Nigeria’s import bill remains high, driven by the reliance of many local companies on foreign inputs for production. The CBN’s ability to defend the naira is constrained by the nation’s weakened external reserves. Current data from the CBN shows that Nigeria’s gross external reserves have fallen to $36.36 billion, primarily due to sustained outflows for FX payments.

While these reserves are technically sufficient to support the naira in the foreign exchange market, a significant portion has been pledged or covenanted in international agreements, further limiting the central bank’s capacity to intervene effectively.

Trading within the Nigerian Autonomous Foreign Exchange Market (NAFEM) saw the naira fluctuating between N1,470 and N1,606, ultimately closing at N1,570.1 per US dollar on Friday. According to FMDQ data, the total volume of US dollars traded in this market declined by 13.4% last week, amounting to a decrease of $125.5 million, bringing the total to $814.2 million by the close of Friday.

Coronation Research reported that the NAFEM window recorded an inflow of $495.2 million, with a breakdown showing that foreign portfolio investors (FPIs) contributed 28.1%, the CBN 2.8%, non-bank corporates 35.9%, exporters 29.7%, and others 3.5%.

In the parallel market, the naira appreciated by 0.31%, closing at N1,605 per US dollar. This simultaneous depreciation of exchange rates in both the official and parallel markets has narrowed the gap between them to less than N1.

Meanwhile, the global oil market faced downward pressure on Wednesday, with Brent crude prices falling by 1.61% to $78.27 per barrel and West Texas Intermediate (WTI) crude declining by 1.77% to $74.19 per barrel. The price drops are attributed to growing concerns over weakened global demand, economic uncertainties, and reduced fuel consumption in China and Europe. Declining diesel demand due to weak manufacturing activity and changes in the vehicle fleet in Europe further contributed to the bearish sentiment. These factors outweighed earlier gains driven by geopolitical risks and supply threats, with additional pressure coming from U.S. Energy Information Administration (EIA) data that showed a smaller-than-expected decrease in U.S. crude oil inventories.