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The Nigerian Naira continues to depreciate, with market participants trading the US dollar at N764.86, as persistent pressures on the local currency persist due to a shortage of foreign exchange. Despite recent attempts to reverse the trend, market rates have fallen as the Central Bank of Nigeria (CBN) struggles to stabilize the Naira.
This pattern of currency devaluation has been a long-standing issue in the foreign exchange market, and recent devaluations have left many in the country feeling uncertain about their income and have contributed to an increasing poverty rate.
Eight years ago, the CBN implemented a ban on 43 items to strengthen the Naira, believing that continuous access to foreign exchange for these items had negative consequences for the market. However, this move increased demand in the parallel market as importers and manufacturers sought foreign currency. The Naira remained below N500 due to the CBN’s interventions, giving a false sense of stability.
Recent data from the foreign exchange market shows a worsening situation in the parallel market, even after the CBN lifted the ban on the 43 items accessing the official forex market.
A review of the FMDQ platform data reveals that the Nigerian Naira depreciated by 3.10% against the US dollar week-on-week, closing at N764.86. This decline is attributed to the insufficient supply of foreign exchange to meet demand.
Further checks show that the exchange rate at the parallel market fell by 5.00% week-on-week to a new low of 1,050. The total value of open contracts at the FMDQ Securities Exchange (SE) FX Contract Market remained unchanged at $4.9 billion.
Surprisingly, the CBN removed quoted prices on instruments, possibly indicating no further entry. To achieve rates convergence, the CBN pledged to clear the forex backlog and boost liquidity in the Nigerian FX market through periodic interventions.
While this is seen as a positive move, doubts linger regarding the capacity to meet the surging demand in the short term, as the country’s external reserves are already stretched. The recent Naira depreciation is expected to slow down somewhat.
The CBN has announced measures to maintain price stability and enhance the functioning of the Nigerian Foreign Exchange Market, including injecting liquidity into the market and gradually reducing interventions as conditions improve.
Importers of the 43 previously restricted items from 2015 are now allowed to purchase foreign exchange as the CBN aims to address the forex backlog and work towards establishing a unified FX market through consultations with various stakeholders.
In the FMDQ Securities Exchange FX Futures Contract Market, the US dollar gained against the Naira across mid to long-term contracts. Forward rates appreciated in favor of the dollar by 0.39%, 0.30%, 0.37%, and 0.07% for 1-month, 2-month, 3-month, and 6-month forward contracts, respectively.
However, the dollar declined by 0.42% in the 12-month forward contract. Oil prices surged nearly 4% following the US’s stricter approach to Western sanctions against Russia, leading to concerns about oil supply disruptions.
The price of Nigerian Bonny Light crude oil also increased, closing at $95.59 per barrel from $93.26 per barrel. Nigeria’s FX reserves saw a positive change, with gross reserves increasing by $1.72 million week-on-week to $33.22 billion, marking the first increase since May 19, 2023.
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