Business
Low activity in forex market signposts slump in Nigerian economy
By FELIX OLOYEDE
The low volume of activities in the Nigerian foreign exchange market is an indication of the poor state of the country’s economy, inhibited by the coronavirus pandemic and significant drop in oil prices, experts have said. The total turnover at the investors’ and Exporters’ window of the Nigerian forex market has shrunk from $22 million in June 2 to $12.45 million at the end of trading on June 26, with dealers complaining of low supply.
The local currency has shed 0.26 per cent this month to N386.50/$ at the I&E forex window, which is believed to be a fair reflection of the value of the naira. At the parallel segment of the market, it has devalued 27.60 per cent this year from N360.50/$ on January 2 to N460/$ as of June 26.
The International Monetary Fund (IMF) recently in its World Economic Outlook Growth Update, lowered Nigerian economy expected growth for this year to -5.4 per cent instead of-3.4 per cent contraction it had earlier projected. The country’s economy growth slowed down to 1.87 per cent in the first quarter of 2020 compared to 2.55 per cent growth recorded in Q4 2019.
The lower volume of trade in the I&E forex window is a reflection of the impact of COVID-19 not just in Nigeria but all over the world,” noted Dr. Vincent Nwani, Managing Consultant, RTC Advisory Ltd.
He also attributed the lull in the forex market to the inability of importers and exporters to ply their trade due to the global ban on international travels as part of measures to curtail the spread of coronavirus.
“It is a reflection of how bad things are. For us, it is big plus because the artificial time Nigeria has to sort out the pressure that will come on the currency when the economies are reopened. There will be a lot of surge in demand for foreign exchange in Nigeria for people to repatriate the profits, buy things for China and do trade finance,” Dr Nwani argued.
He mentioned that the low activity in the forex market is helping to keep the artificial value of the naira.
“Most importantly, in the last couple of months, we have a slowdown in economic activities globally. We have seen a situation where portfolio investors are not aggressive in investing in other countries. Globally, the economy was shut down for two months,” said Mr Johnson Chukwu, Managing Director, Cowry Asset Management Ltd, an investment firm.
He explained that the clash in oil price created panic among portfolio investors in the country and slowdown capital flow into the country.
Foreign inflow into the Nigerian equity market declined -22.60 per cent from N23.81 billion in January to N18.43 billion in May, The Nigerian Stock Exchange’s Domestic & Foreign Portfolio Investment Report for May showed.
Mr. Chukwu noted that the need to make Nigeria a destination of choice for portfolio investors, may have forced the government to be considering harmonizing the country’s exchange rate.
“If we have to position our economy to be among the first point of call for foreign portfolio investors, need to have a harmonized exchange rate that is market reflective,” he added.
The country has been battling with multiple exchange rates for years, which investors believe do not indicate the true value of the naira, as the Central Bank has been spending billions of dollars from the country’s external reserves defending.
Nigeria’s foreign reserves has waned 6.17 per cent this year to $36.22 as of June 25, though the price of oil which is the country’s major exchange earner has declined 37.56 per cent this year to $41.21 per barrel as of June 26, having dipped to almost 18 year low of $19.33 on April 21.
Experts expect the economy to contract sharply in the second quarter of the year as the five weeks lockdown imposed by the government on March 27 to curtail the spread of the pandemic, which was eventually lifted on May 4, occurred in the quarter.
The country has not only been struggling with weakening economy, as Nigerian inflation rate has accelerated nine consecutive months to 12.4 per cent, which is the highest in over 2 years. Meanwhile, to alleviate the impact of COVID-19 on the Nigerian economy the government recently launched a N2.7 trillion stimulus plan, which analysts argued may be insufficient to reflate the economy.
