BY EMEKA EJERE
Despite concerted efforts by the Central Bank of Nigeria (CBN), recent developments suggest that there is no end in sight to the weakening of the Nigerian local currency, the naira.
The exchange rate between the naira and dollar depreciated to N410.25/$1 at the official NAFEX window on December 31, 2020 ending a tumultuous year for the currency market.
At N410.25/$1, the exchange rate officially depreciated by 11.8% for 2020 at the official NAFEX window of the FMDQOTC where forex is traded by investors and exporters. In line with accounting standards, companies across Nigeria who have dollars in their bank accounts will convert their balances to naira using N410.25/$1.
Also, the naira remained stable against the dollar – closing at N470/$1 at the parallel market on Thursday, December 31, 2020 – as the CBN moved towards exchange rate unification with the devaluation of the naira at NAFEX market.
The local currency had been devalued by 2.27 per cent in November 2020 to N495 against the dollar from N484 at the parallel market, where foreign currency is more accessible making it to shed 6.45 per cent of its value in one month, due to dollar scarcity in the country as a capital inflow in the nation’s economy waned.
The activities of foreign exchange speculators, who are expecting the CBN to further devalue the naira, have also taken a heavy toll on the local currency. The naira also weakened 1.30 per cent to N390 at the Investors’ and Exporters’ forex window at the time, with importers and manufacturers having tough time funding their Letters of Credits.
“Forex is not available even at the current rate. You cannot get the quantum of forex you need to be able to import your raw materials and machinery. It is really impacting negatively on the growth of manufacturing”, said Ambrose Oruche, Acting Director-General, Manufacturers’ Association of Nigeria (MAN) in a telephone chat with BusinessHallmark
“There is a school of thought that says, why not devalue so that it becomes market-driven? But the CBN says that will be dangerous for the economy. But I do not know which is better: the situation we are in or allowing a market-driven exchange rate.”
Alhaji Aminu Gwadabe, President, Association of Bureau de Change Operators of Nigeria (ABCON) ascribed the renewed pressure on the naira to illicit financial transactions in terms of hoarding, speculation, illegal cash evacuation among other acts of sabotage.
“There is a calculated attempt to force the Central Bank of Nigeria to devalue the naira,” he had noted.
He called on the apex bank to grant BDC operators payment bill so that it can help broaden the country’s forex market. He also expressed worry that Diaspora remittances in the country go through few hands, which has inhibited its impact in the forex market.
“The naira is under pressure, obviously from unmet demand. Supply is way below demand, that is putting the naira under pressure at the parallel market,” said Mr. Johnson Chukwu, Managing Director, Cowry Assets Management Company.
According to him, the drop in Nigeria’s oil output to 1.7 million barrel per day has not enabled the country to maximise the 135.48 per cent appreciation in oil price in the last seven months to $48.18 as of Saturday, November 28.
Mr. KayodeOmoregie, Faculty member in Finance and Strategy at the Lagos Business School, posited that the Naira devaluation is a function of the rationing of the dollar by the CBN relative to demand (demand, real and speculative far exceeds supply).
“Our national dollar inflows are not just from oil earnings, it is also from FDI, FPI (foreign direct and portfolio investments), all of which has diminished significantly, and Diaspora inflows also (which by some estimates exceeds even oil revenue inflows),” he further said.
“Our national revenue profile has diminished and so we are borrowing heavily. Also debt servicing (in dollars) – as a percentage of revenue – has increased and will remain so for some time to come.
“This implies that Nigeria’s requirement for dollars into the future will also increase or be relatively high for some time to come and so futures value of naira relative to the dollar is also trending down. This is also exacerbated by the inflation trend. The real inflation rate is more in the region on 20-24 per cent (some estimates put it at 34 per cent and not the official figures of 14.1 per cent).
He noted that the demand for dollar relative to supply is high now and in the near future.
“Think of dollar as a commodity in high demand relative to supply. The cost in Naira terms will go up (devaluation). Let us not also forget the role of speculators, leakages and round-tripping and hoarding of the dollar.”
“Given the expected slow growth of the global economy in 2021 and the current economic recession in Nigerian which is likely to persist to Q2 2021, we should be expecting a devaluation of the naira in the parallel market in the region of N500 – N550 /$1.
“Official rates may tolerate a 20/25 per cent spread, with an exchange rate from the official window in the N400 – N420/$1 range, if the political will is there.
“With our current macroeconomic realities and fundamentals, it makes sense to devalue and absorb this shock within a narrow timeline to ease speculation, volatility and uncertainty with the exchange rate, which is worse for business in the short-term for businesses and FDI/FPI investments,” he submitted.
The apex bank had explained that Nigeria, like other emerging economies and countries that are oil-dependent, is gravely impacted by the decline in crude oil earnings as well as the retreat by foreign portfolio investors, which has significantly affected the supply of foreign exchange.
“In order to adjust for the decrease in the supply of foreign exchange, the naira depreciated from N305/$ to N360/$ and subsequently to N380/$”, CBN governor Mr. Godwin Emefiele, said at the end of the last MPC meeting.
“With the decline in our foreign exchange earnings and successive exchange rate adjustments, the CBN has continued to implement a demand management framework, which is designed to bolster the production of items that can be produced in Nigeria, and aid conservation of our external reserves,” Emefiele also said at a Charted Institute of Bankers of Nigeria (CIBN) annual dinner/.
The CBN has now devalued the exchange rate at least three times this year at the official investors’ and exporters’ window as it strives to bridge the disparity between the official and parallel market rates.
The first devaluation occurred on March 20th when the exchange rate went from N307 to about N360 on the NAFEX market The second occurred on August 6th when it went from N360 to N380 to the dollar respectively. The I&E window has often recorded naira devaluation ahead of the CBN official rate.