By FELIX OLOYEDE
Pressure has continued to intensity on Nigerian Naira despite a moderate uptick in crude oil prices this year as the currency depreciated in two major segments of the country’s foreign exchange market on Friday and foreign exchange scarcity persists.
The 21% increase in crude oil price year to $62.91 on Friday from $58.80 as of December could not firm up the local currency which has devalued 4% this year to N410.00/$ at the Investors’ and Exporters’ forex window, which is believed to fairly reflect the market value of the naira. On Friday alone, it depreciated by 0.54%.
At the alterative market, it was sold for N478/$ on Friday instead of N477/$ it exchanged the previous week, down 0.21% and naira was stable at N379/$ at the official forex window.
Moses Ojo, Chief Economist/Head, Investment Research, PanAfrican Capital Holdings, attributed the slump in the value of the local currency to the Central Bank’s (CBN) decision to slow down intervention in the forex market due to the decline in the country’s external reserves.
Nigeria’s external reserve has dipped 2.50% in the last month to $35.53 billion as the country lost what it gained in oil price rise to plunge in output and high cost fuel import with landing cost rising from N179 per litre to about N198. Fuel import is a major forex demand pressure.
Data obtained from the Organisation of Petroleum Exporting Countries (OPEC) showed that the country’s oil output declined to 1.38m barrel per day in January from its maximum output of 2.2m barrel per day.
Wood Mackenzie, UK-based energy research and consultancy firm, recently projected that Nigeria’s oil output may experience a 35% decline over 10 years because companies delay investments in key oilfields.
The firm said that investors may delay the exploration of three deep offshore fields, which would generate more than $2 billion a year for the government at peak production because they decide to invest in economies with better returns.
“Nigeria is going to enter quite a steep decline in production,” said Lennert Koch, principal analyst of sub-Saharan Africa upstream with Wood Mackenzie. “In order to keep its revenue up…it needs to develop additional fields.”
Ojo noted that if the country can ramp up oil production, the Central Bank would resume its intervention in the forex market, which would help address the current volatility challenge in the market.
Apart from the significant drop in Nigeria’s oil production, which rakes in 90% of its foreign earnings, the decline in foreign portfolio/direct investment and diaspora remittances have also adversely impacted its forex market.
The country’s capital importation (foreign direct investment inflow) declined 74.03% to $1.46billion third quarter when compared to the corresponding of 2019. During this period, foreign portfolio investment plunged -86.55%.
The low returns in Nigeria’s fixed income market also dissuaded foreign investors as many of them took a flight to safer markets that were giving higher returns. The slump in the global economy has also not helped matters, which has made many Nigerians abroad unable to remit funds home.
Meanwhile, things seemed to be looking up with the global economy is beginning to open up bolstered bythe development of vaccines to tackle the coronavirus pandemic, which brought a lot of economies to their kneels last years.
The Nigerian economy has also shown a glimpse that the worst days are over, having turned the corner by recovering from a recession in December, recording 0.11% growth in Q4 2020 after posting two consecutive negative growth in the second and third quarters.
If the economic recovery is sustained and the COVID-19 pandemic continues to slow down, foreign investors may look at the country’s direction again and reversed the downtrend of Nigeria’s foreign inflow.
In the main time, the International Monetary Fund (IMF) recently urged the Central Bank of Nigeria to unify the country’s multiple exchange rate. Although the apex bank efforts at unifying exchange rates have not yielded result as the gap between the official rates and the black-market rates has continued to widen, giving room for speculation and arbitrage.
The CBN has been employing different unorthodox policies to manage the forex scarcity as it recently said Nigerians can receive remittance into their domiciliary accounts, having earlier barred them from doing so.
Last year, it directed that those who have dollars in a domiciliary account, which are not direct transfer and must be up to $100,000 cannot be fixed in any Nigerian bank.
The apex bank had in 2016, closed the RDAS/WDAS foreign exchange window to checkmate the activities of economic agents who were engaging in undesirable practices, including round-tripping, speculative demand, rent-seeking, spurious demand.
It also stopped the weekly sale of forex to Bureau De Change (BDC) operators in the country before the restriction was later lifted. Equally, it excluded 41 items, including rice, wheat, and palm oil from accessing forex at its official window in its bid to conserve the reserves and protect the local industry and encourage exports.
It had since added some other items into the list of things that were not allowed to access forex from the official windows, despite complaints from the private sectors.
The CBN ordered banks to publish details of all foreign exchange transactions on the Financial Market Dealers Quote (FMDQ) platform.
In 2015, the CBN restricted cash deposit of dollars into domiciliary accounts, saying it would only allow transfer into these accounts. It, however, stated that holders of domiciliary accounts could make cash withdrawals once it was used for transactions that are valid for forex. It also limited ATM withdrawals abroad to $300 per day and local ATM withdrawals to N60,000 from N100,000 daily and vowed to continue to defend the naira.
It also entered into a currency swap agreement with China in 2018 to ease pressure on the naira as China is one of the country’s largest trade partners. However, the deal has had a minimal effect on the value of the local currency.