Nigerian Naira Continues Depreciation as FX Market Conditions Deteriorate

The Nigerian naira is experiencing further depreciation, driven by the persistent pressure on the foreign exchange (Forex) market caused by a sustained shortage of the United States (US) dollar. This scarcity of foreign currency is particularly concerning for an economy heavily reliant on foreign inputs for both production and consumption.

Despite concerted efforts to stimulate foreign currency inflows, the supply of FX into the official window continues to fall short of the substantial demand. Consequently, the central bank has been forced to devalue the naira significantly. Although the central bank took steps to align the local currency’s value with the open market rate in June, speculative activities persist.

The gap, or FX spread, between the official and parallel market rates has widened to over N200 against the US dollar, reflecting the challenging economic conditions. This discrepancy is accentuated by lackluster foreign receipts from both crude oil and non-crude oil sources, a critical factor in Nigeria’s economy.

Moreover, an investment firm, Cordros Capital, suggests that Nigeria’s external reserve balance is being overestimated. Their analysis indicates that Nigeria might be operating with a negative balance in its external reserves.

“Significant foreign currency inflows are imperative for Nigeria’s foreign currency positioning. These inflows must originate from offshore investors or be earned through the export of goods and services that foreign countries are willing to pay for. The former is more feasible, while achieving the latter could be a much more protracted process,” noted LSintelligence Associates in a conversation with MarketForces Africa.

In the market, the Naira has experienced depreciation against the US dollar at the Investors and Exporters FX windows, trading at N774.77. This represents around a 4% decline from its opening rate of N744.10. However, a slight appreciation of 0.32% against the US dollar was observed in the parallel market, where the Naira strengthened to N942. This modest shift can be attributed to fluctuations in the global oil market.

On Tuesday, Brent crude oil recorded a decline of 1.92%, settling at $84.56 per barrel. Simultaneously, WTI crude oil witnessed a loss of 2.59%, reaching $80.37 per barrel. These oil futures observed downward trends due to growing concerns about demand following discouraging economic data from China, outweighing any constraints on supply.