FX volatility: BDCs’ reintroduction triggers divergent expectations


Resent unification of exchange rate windows by the Central Bank of Nigeria (CBN) does not seem to be yielding the desired result of considerable stability in the foreign exchange market anytime soon. Rather, the policy step is fueling a dollar demand pressure that is compounding the liquidity crunch arising from backlog of unmet forex demands in the face of depleting foreign reserves.

Business Hallmark reported last week that the Economic Intelligence Unit (EIU) predicted in its latest report about the naira that the Nigerian government would go back to a system, where they have more control over the exchange rate, to prevent the local currency from losing its value much further. The Unit pointed out that the CBN, which manages the country’s money, does not have much experience handling a flexible exchange rate system.

The EIU said, “The CBN lacks experience in conducting monetary policy under a float, and the need to control rapidly increasing inflation will become more acute over time.”

According to the EIU, which is an arm of London-based The Economist Magazine, the pressure on naira would continue in the near term, falling to as low as N1,018 per dollar in 2027, as high and rising inflation persist. The average rate is forecast at N815 to US$1 in 2024, sliding to N1,018 to US$1 by the end of 2027, with a spread of 10-15 percent against the black-market over the period, the EIU report stated.

“Along with high and rising inflation, the naira will be under significant pressure in the near term”, the report said.


Naira on Thursday depreciated to a new low of N885 per dollar at the parallel market. The foreign exchange market closed on Thursday with naira weakening by 1.14 percent as the dollar traded at N885/$1 as against N875/$1 traded on Wednesday at the parallel market.


Traders attributed the naira depreciation to strong demand for dollars by importers and travelers. The local currency first weakened to N885 per dollar in November 2022 due to demand pressure at the black market.


The pressure on naira continued at the Investors’ and Exporters’ (I&E) forex window, Nigeria’s official FX market as naira also depreciated, losing 4.70 percent against the dollar. After trading on Thursday, the dollar was quoted at the rate of N776.50/$1 from N741.64 quoted on Wednesday at the I&E window, data from the FMDQ showed.


Willing buyers and sellers maintained bids as high as N804 per dollar on Thursday, and Tuesday, which was stronger than N830/$1 on Monday, but weaker than N799.50/$1, on Friday.

The market auction also recorded lower bids of N700 per dollar on Thursday and Tuesday, weaker than N651.00 per dollar on Monday, but stronger than N465.00 bid on Friday at the I&E window.


The daily FX market turnover, which reflects the volume of transactions at the I&E window, declined by 34.01 percent to $44.43 million on Thursday from $67.33 million recorded on Tuesday.


Last week, Chief Executive Officer, Centre for the Promotion of Private Enterprise, (CPPE), Dr. Muda Yusuf, said the foreign exchange market was evidently under pressure as a result of a number of factors, including a surge in monetary expansion in the last month.


In a statement sent to our correspondent, Yusuf said, “Money supply grew by an unprecedented 15 per cent in one month between May and June 2023. Broad money grew by over N9tn, from N55.7tn to N64.9tn. This surge in monetary growth is unprecedented. Obviously, this must have had an effect on the exchange rate.”


He called on the monetary authorities to investigate this drastic growth in money supply and take steps to curb subsequent expansion, stressing that such dramatic growth in money supply “poses a significant risk to macroeconomic stability, especially price stability.”


According to him, over the last few years there had been a cumulative backlog of unmet foreign exchange demand running into billions of dollars as a result of acute illiquidity in the foreign exchange market.


He said with a more liberalised forex market, the pressure of the backlog of unmet demands and other maturing forex-related obligations had been unleashed on the investors’ and exporters’ window.


On June 14, 2023 the CBN collapsed all segments of the FX market into I&E window, Nigeria’s official foreign exchange market, and re-introduced the willing buyers and willing sellers. Consequently, the official exchange rate rose from N463.38/$ to N775.76, the current rate.


“Foreign-exchange scarcity will persist in the near term despite partial unification of the official and the black-market exchange rates. We expect the Central Bank of Nigeria to revert to heavier management of the exchange rate in late 2023 to tame rapid price rises,” analysts at EIU said.


The EIU report noted that the CBN unified Nigeria’s multiple exchange rates in June, leading to the sharpest devaluation of the naira in history and a sharp narrowing of the (formerly 60%) spread with the black-market rate, to about 3 percent. The new exchange rate is classed by the CBN as a “managed float”, but there are inconsistencies in application to a more liberal currency regime as foreign-exchange access restrictions still apply to an array of imports.


This will unnerve foreign investors, and a backlog of foreign-exchange orders the CBN failed to clear before opening up the market and deeply negative real interest rates will keep liquidity tight, EIU said.


However, at a Senate screening to confirm his nomination as a minister on Tuesday, Wale Edun, who is advising President Bola Tinubu, on monetary policy, noted that a weaker exchange rate of around 860 naira, a level where the currency is quoted on the parallel market, is not backed by economic fundamentals. He said the exchange rate should be at N700/$1 as liquidity flows in. According to him, speculators may lose their shirts if liquidity inflows increase and the exchange rate rapidly comes down.


“The issue of foreign exchange is clearly uppermost in the minds of the monetary authorities. What I can say is this: For a country that has revenue flows from oil revenues, from remittances, from other non-oil exports, and from financing of over $100 billion a year, there is no reason that there should not be a stable exchange rate,” Edun said.


“All other things being equal and provided inflation is kept under control, the N860/$ that we are seeing is not backed up by the fundamentals of the Nigerian economy.’”


Meanwhile, human right lawyer, Femi Falana, has urged the Federal Government not to follow the dictates of the International Monetary Fund (IMF), saying it should trade with countries that accept naira as exchange rate.

He also admonished President Bola Tinubu’s administration to enforce the Central Bank Act and take charge of the country’s economy.


Falana, who was addressing pressmen during the NLC protest in Abuja on Wednesday said, “The FG should allow our country to control its economy and not hand over the economy to the IMF and World Bank.”


“We are challenging the government to trade with countries that are prepared to accept the naira as a medium of exchange. There’s a new international economic order [BRICS], and Nigeria must be part of that structure to challenge the dollar.”

He also spoke against the practice of paying for services in the country with the dollar rather than the naira.

“There can be no basis to allow some landlords to collect dollars in Nigeria as rent. There can be no basis to collect school fees in Nigeria in dollars. There can be no justification for paying for certain services in dollars in our country.”

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