Pressure mounts on naira, falls to N1,740 in parallel market

There are indications that the local currency is set to fully reverse its gains as the depreciation trend enters a new height, hitting N1,740/$1 in the parallel market at the close of trading last weekend.

However, the Naira remained stable with minor appreciation in the Nigerian Autonomous Foreign Exchange Market, NAFEM, as dealers speculate that the Central Bank of Nigeria, CBN, would likely intervene any moment from now to curtail the pressure on the exchange rate.

Data from FMDQ showed that the indicative exchange rate for NAFEM fell to N1,600 per dollar from N1,601.2 per dollar on Thursday, indicating N1.2 appreciation for the naira.

Dealers who spoke to Financial Vanguard at the weekend said they expect the exchange rate to close this month around N1,750/$1 while 2024 may end at over N1,800/$1.

If this trend continues, by the end of the year, the local currency will have wiped out the gains it made in March this year when it suddenly appreciated massively, climbing down from an all-time high rate of N1,820/ $1 in February 2024 to N1,310/ $1 and further down to N1,240/ $1.

However, the appreciation was halted in April; subsequently, depreciation began and sustained until last week.

Year-on-year, YoY, Naira depreciated in the parallel market by 70.5 per cent to N1,705 per dollar at the close of the third quarter trading on September 30, 2024, from an average of N1,000/ $1 in September 2023.

Year-to-Date, YtD, depreciated by 16.7 per cent from N1,490/ $1 in January 2024.

The Naira recorded a massive 104% YoY depreciation in the official segment, NAFEM, to N1540.78 per dollar in September 2024 from N755.27 in September 2023. However, YoY NAFEM has recorded just 9.9 per cent depreciation to N1600/ $1 last weekend from N1,455.9/ $1 in January 2024.

Analysts and dealers have blamed the sustained depreciation of the local currency on supply shortages.

The monetary and fiscal policy authorities appear to be seeing the problem differently. At the last Monetary Policy Committee (MPC) meeting, the Governor of the CBN, Mr. Yemi Cardoso, who doubles as the MPC Chairman stated that members of the MPC had noticed a correlation between the period of FAAC disbursement and demand pressures in the foreign exchange market.

According to him, the apex bank will monitor future FAAC allocation disbursement to determine the impact on the FX market.

Cardoso stated: “Furthermore, members observed a strong correlation between FAAC releases and liquidity levels in the banking system as well as its impacts on the exchange rates.”

“The committee therefore agreed to increase monitoring of future releases to address its effects on price development.”

This position creates the impression that fiscal actions have been undermining the exchange rate stability with demand pressures.

However, last week in Washington DC, on the sidelines of the just concluded World Bank Group annual meetings, the Minister of Finance and Coordinating Minister of the Economy, Mr Wale Edun, said the problem with Nigeria’s foreign exchange market is supply and as an oil-producing nation, Nigeria could address that by significantly increasing her oil production output.

He stated: “The key about the foreign exchange market really is supply and as you know we are an oil-producing country, we just need to get our oil production up and that will deal with that issue of foreign exchange supply and pressure on foreign exchange anytime there are large flows.”

This implied that rather than demand pressure from whichever quarters, the problem is inadequate supply.

Meanwhile, forex dealers have said the acute shortage amidst demand pressures has shifted the exchange rate near the Central Bank of Nigeria’s (CBN) “fear index”, a development which they believe would compel the apex bank to launch emergency defensive measures including raising the volume of supply intervention involving all dealers to boost FX liquidity.

They also believe such a reaction from the apex bank would prevent the exchange rate from further deterioration and possibly pull it back from the fear zone.

Since August 8, the CBN has not conducted retail Dutch FX auctions it resumed in 2024 as the apex bank tinkers with a ‘minimal intervention’ approach, a behaviour some dealers believe was not unconnected with the challenges of limited forex resources available to it.

Some of the dealers told Financial Vanguard that the expected intervention from the apex bank would be complemented by a plan by the CBN to test-run its new Automated FX Trading model next month.

The model which is designed to enhance transparency and controls in the market, is planned to go live from December, ditching a nearly decade-old over-the-counter trading system in a bid to enhance transparency and remove market distortions.

According to the apex bank, the new system would “facilitate a market-driven exchange rate accessible to the public”.

In a circular released on October 02, 2024 which provided the guidelines for the new system, the CBN stated: “This development is expected to reduce speculative activities, eliminate market distortions and give the CBN improved oversight.”

The CBN said a two-week test run would be carried out in November, without specifying the exact dates.

Naira may rank worst globally

The current rate of depreciation would likely present Naira as the worst-performing currency worldwide in 2024.

The Federal Government had celebrated the sharp appreciation of the Naira in March 2024, noting that the development ranked it as one of the best-performing currencies then.

However, with the renewed depreciation trend, the World Bank, last week ranked the Naira amongst the worst-performing in sub-Sahara Africa.

Dealers comment

Commenting on the state of the parallel market, some of the dealers told Financial Vanguard about their supply and demand situation in the official market.

According to them, when big buyers fail to get supply from the official market they resort to the black market.

They also said the supply they get from some people connected in the official market may be difficult to get, a situation which makes the USDollar to be very scarce and forces the exchange rate to go up.

Mr. Liasu Moshood, a black market trader said: “The depreciation of Naira in the market is due to the rush for dollars by importers who don’t have access to the official foreign exchange market. “There is less dollar supply everywhere and not all of us come to the market now because you can hardly get dollars you want to trade.

“These importers are sourcing large amounts of dollars from our market because those Bureau De Changes cannot meet their demands. Even the banks.

On his part, Mr. Idris Daud, a trader projected the dollar to close the month at N1,750 per dollar and end the year at N1,800 threshold. “Today, the dollar is sold between N1,730 and N1,740, especially by top foreign exchange black market dealers.

“The demand pressure now is high as more organizations are trying to import goods for the festive season in December and at the same time some are trying to restock before year-end as they are not certain what the foreign exchange rate might be before the end of the year. This is another reason for the pressure.

“There is also less inflows of foreign exchange getting to our end and we end up with little supply.

“I foresee the naira closing this month at N1,750 against the dollar and in the next three months at N1,800 per dollar on the back of continued pressure on demand and supply factor.”