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Fear of further devaluation rife as naira’s slide continues

The naira hit record lows at the weekend as market forces continued to force downward shift in Central Bank of Nigeria (CBN)’s regulated foreign exchange (forex) rates.

The naira fell to lowest points across the official and parallel markets, creating similar ripple effects on naira-based foreign exchange (forex) contracts.

At the official Investor & Exporter (I & E) window, naira fell by 1.1 per cent to N390.25 per dollar at the weekend, its lowest rate since the introduction of the window in 2017. At the parallel market, naira weakened by 2.2 per cent to a record low of N495.00 per dollar.

Year-to-date analysis showed that the naira has so far this year fallen by 6.6 per cent at the official I & E window and by 26.9 per cent at the parallel market.

Trading report at the weekend also showed that the naira depreciated at the forwards market. The one-month forward contract depreciated by 1.2 per cent to N390.28 per dollar. The three-month forward contract declined by 1.1 per cent to N390.38 per dollar. The six-month contract weakened by 1.1 per cent to N390.57 per dollar while the one-year contract depreciated by 0.9 per cent to N391.44 per dollar.

Market analysts attributed the depreciation to forex squeeze as CBN’s forex sale interventions remain substantially below demand. Nigeria’s forex reserves declined by $40.05 million to close weekend at $35.45 billion, showing the mismatch between forex funding requirement under the apex bank’s forex regime and inflows.

The Nigerian forex market has remained volatile despite sale of more than $1 billion to Bureau De Change (BDCs) since September 2020 in a bid to inject more liquidity and ease demand pressures.

While the apex bank had attempted to discountenance the galloping rate at the forex market, market analysts had pointed out the relationship between the official and parallel markets, as pressure from unmet demand transits from official to the parallel market. CBN’s Governor, Mr. Godiwn Emefiele had said the parallel market makes up only five per cent of the overall forex market and as such, should not be used to determine naira’s true value.

Most analysts expected the naira to decline further , with many suggesting the rate may spin dramatically out of CBN’s control if global crude oil, and Nigeria’s forex reserves, suffers a meltdown.

“Going forward, we expect CBN’s forex management strategies to continue supporting the naira at its current level at the official and I & E windows. However, we believe the parallel market rate will remain volatile and continue to trade above the CBN’s Relative Purchasing Power Parity (RPPP) of N433.64 per dollar and our REER fair value estimate of N453.67 per dollar at the current level of intervention in the forex market,” Cordros Group, a leading investment banking group, stated at the weekend.

Analysts at Cordros also expressed concerns that the lack of clear-cut guidance from the apex bank on how forex liquidity constraints and the widening spread between the parallel market and NAFEX rates would be addressed will continue to hurt manufacturing activities.

The Monetary Policy Committee (MPC) of the CBN had at its last meeting of the year last week unanimously voted to leave its rates unchanged, citing the need to restore economic growth due to the current economic recession and the need to achieve medium-term macroeconomic stability. The MPC projects that Nigeria will recover from the recession by the end of this quarter while inflation could moderate by the end of first quarter 2021.

Analysts at Cordros said the MPC could revert to a slightly hawkish stance if economic growth shifts back into positive territory to resolve the imbalance in the external sector and attain macroeconomic stability.

“We note that if external conditions do not show significant improvement in the medium term, the committee runs the risk of tightening aggressively, which would result in financial market turbulence,” Cordros stated.

Senior Research Analyst, FXTM, Lukman Otunuga has said the naira was poised to decline further as the Central Bank of Nigeria (CBN) has limited capacity to sustain its restrictive foreign exchange (forex) management.

“Although the Central Bank of Nigeria has devalued the Naira by 20 per cent in 2020 in an effort to unify its exchange rates, the naira could be poised to decline further as falling reserves complicate the Central Bank of Nigeria’s (CBN) efforts in defending the local currency,” Otunuga said.

He said Nigeria’s economic picture remains clouded by external and domestic risks noting that while dollar shortages continue to punish the private sector, rising inflationary pressures amid border closures and COVID-19 related disruptions have hit consumers.

He explained the negative impact of the decline in crude oil price and production on the Nigerian economy, pointing out that while crude oil contributes less than 10 per cent of the Gross Domestic Product (GDP), it accounts for some 90 per cent of foreign exchange earnings and half of government revenues.

According to him, Nigerian economic situation was compounded by its dependence on oil revenue. As oil production fell to 1.67 million barrels a day amid OPEC supply cuts and prices struggled to break away from the sticky $40 level, export earnings evaporated.

“Essentially, the collapse in oil prices in the wake of the pandemic has drained government coffers,” Otunuga said.

He noted that the current rate at the parallel markets was the weakest level in more than six weeks as CBN’s intervention in the official window failed to meet demand.

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