Godwin Emefiele, CBN Governor


The demand for dollars by businesses that have obligations to settle abroad and the dearth of inflows into Nigeria have intensified pressure in the country’s foreign exchange market.

The naira has lost 8.01 per cent of its value in the last one month to peg at N445 against the dollar at the parallel market as of Friday, despite Lagos and Abuja, the country’s commercial and political nerve centres respectively, as well Ogun being in lockdown, due to the coronavirus which has been ravaging the country like other parts of the world.

The Central Bank of Nigeria (CBN) devalued the local currency by 15 per cent from N306/$ to N360/$ at the official forex window and it also weakened by 5.56 per cent to N380/$ from N360/$ on March 20. The volatility in the forex market was further exasperated by the crumbling of oil price which is the country main source of the dollar.

The significant drop in the oil price which was occasioned by a glut in the international market and Saudi-Russia trade war and the COVID-19 pandemic, have propelled portfolio investors to pull out of the country, mopping up scared dollars.

Oil price dipped to 18 years low of less than $20 per barrel last month despite the agreement by Organisation of Oil Producing Countries (OPEC) and others outside the bloc to cut output by 10 million barrels. It has now recovered to $26.76 as of Friday.

Worried by the dwindling fortune of the local currency, the Central Bank of Nigeria (CBN) was forced to resume sales of dollars for school fees and SMEs, promising to inject $100 million weekly into the market through banks. It also planned to resume weekly allocations of dollars sales to bureau de change operators, which it has suspended since the end of March due to the lockdown in the country.

Johnson Chukwu, Managing Director, Cowry Asset Management, an investment company based in Lagos, narrowed the cause of the renewed volatility in the forex market to the suspension of CBN interventions in the market, which is the main source of the market liquidity and absence of inflows from foreign portfolio investors into the country due to the COVID-19 pandemic.

He allayed the fear that the pressure would heighten when economic activities partially resume in Lagos and Abuja.

“When the lockdown is lifted, you are not going to see fresh demand. What you will see is existing liabilities that are to be meant,” he noted.

The Nigerian external reserve has depleted by 5.83 per cent in the last one month to $33.44 billion as of April 28, but this will be buoyed by the $3.4 billion loan from the International Monetary Fund (IMF) to help Nigeria tackle the impact of the coronavirus pandemic.

For Damilare Asimiyu, Financial Analyst with GTI Securities, the uncertainty which has pervaded the search for solutions to the coronavirus pandemic, has contributed to the pressure in the forex market as foreign portfolio investors cashed out from the economy in droves. He explained that the spike in the cases globally instead of the curve flattening has intensified investors’ fears.

“And given the fact that the two major economies of the world have released their GDP figures, we have seen the extent of damage caused by the pandemic. So, investors would want to price their expectations properly,” he asserted.

Meanwhile, analysts at CSL Stockbrokers believe a further devaluation of the naira would worsen banks asset quality, erode capital and foreign currency liquidity. They argued that “First is asset quality: a few sectors show more vulnerability to depressed oil prices and devaluation in the local currency and as such bank lending to these sectors will most likely show signs of strain.

“One of such sectors is the oil and gas upstream/midstream sector. In conversations with banks over the past few weeks, we understand that some banks like Guaranty Trust Bank have hedged its oil and gas exposure over several months while many others believe that it will be possible to restructure these loans – apparently with little effect on asset quality in the short term.

“Second is capital erosion: devaluation, in theory, challenges capital adequacy ratios (CAR) because the Naira-equivalent value of risk-weighted assets (RWA) rises as this includes foreign currency loans.”

They opined that borrowings made by banks in U.S dollars are problematic under a devaluation scenario.

“As such, banks need to have to perform U.S dollar assets in order to receive dollars with which to service their own US dollar borrowings,” they explained further.

Moody’s, a global credit rating agency had recently downgraded the ratings Nigerian banks to negative from stable, hinging its decision on the projection that the banks will face weakening loan quality and foreign-currency liquidity challenges, driven by the oil price crisis and COVID-19 pandemic, which would adversely impact the Nigerian economy.


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