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Naira falls to another 3-year low at black market as forex liquidity still remains scarce - NAIRAMETRICS

JULY 12, 2020

The drop is due to pressure on the black market as a result of a scarcity of dollars.

The exchange rate at the parallel market fell to another new 3-year low on Friday closing at n465/$1. However, on the officially recognized NAFEX Market, the Forex turnover was somewhat stable with only a slight drop of 0.08% on Friday as the exchange rate was weakened to N387/$1.

Parallel Market:At the black market where forex is traded unofficially, the Naira depreciated by N2 to a dollar to close at N465 to a dollar on Friday as against the N463 to a dollar on Thursday, another new 3-year low for the Naira. The exchange rate at the begining of the week was N461 to a dollar. The drop is due to pressure on the black market as a result of scarcity of dollars, expecially at the official. This has made most businesses to source for thier foreign exchange at the black market.

NAFEX: The Naira depreciated against the dollar at the Investors and Exporters (I&E) window on Friday, closing at N387 to a dollar compared to the N386.50 that was reported on Thursday, July 9, representing a 50 kobo drop. This is as traders are still confused over CBN's adjustment of the exchange rate at the SMIS window. The opening indicative rate was N386.13 to a dollar on Friday. This represents an 83 kobo gain when compared to the N386.96 to a dollar that was recorded on Thursday.

Nigeria maintains multiple exchange rates comprising the CBN official rate, the BDC rates, SMIS and the NAFEX (I&E window). Nairametrics reported last week that the governmenthas set plans in motion to unify the multiple exchange rates in line with requirements from the World Bank. Nigeria is seeking a world bank loan of up to $3 billion. The country has beenunder pressure from the International Monetary Funnd and the World Bank for currency reforms.

Forex Turnover

Meanwhile, forex turnover at the Investor and Exporters (I&E) window was somewhat stable on Friday July 10, 2020 as it dropped by an insignificant 0.08% a day. According to the data tracked by Nairametrics, forex turnover slightly dropped from $25.19 million on Thursday, July 9, 2020 to $25.17 million on Friday July 10,2020. The low turnover is an indication of the liquidity pressure in the foreign exchange market and a far cry from an average of $200 million recorded at the major trading days during the last few weeks.


Rate Adjustment 

Nairametrics reported last week that the CBN official rate has been adjusted from N360 to a dollar to N381 as reflected on the website of the FMDQ. However, the confusion in the forex market still persists as official rate quoted on the website of the CBN remains at N360/$1.

According to Bloomberg, "Nigeria quietly devalued its official exchange rate last week, a nod to IMF suggestions that foreign investors would appreciate the unification of a currency that has traded at multiple rates for five years. In the event, the handing of the 5.5% devaluation of N381 per dollar still served to sow confusion. The central bank hasn't announced the change and is yet to adjust the rate on it's website."

What this means: Unifying the Naira around the NAFEX rate is effectively another round of devaluation. If this is carried out and forex liquidity improves, then it could lead to an exchange rate being strengthened in the parallel market just like it occured in 2017. 

The parallel market rate is currently N465/$1 and could converge to the NAFEX rate, meaning those who bought above the black market rate could lose money if they sell.

The county's monetary authority had imposed multiple exhange rates to manage dollar demand after oil prices crashed but dollar shortages which have become prevalent stifles growth in the economy.

According to a report from Nairametrics, the Manufacturers Association of Nigeria (MAN), has expressed its support to the recent CBN's exchnage rate unification drive. They said that this wwill boost investor confidence and enable stable planned production for the manufacturers thereby leading to economic growth in the country.

This however, contradicts the view of the Nigeria Employers' Consultative Association (NECA), who does not support the exchange rate adjustment at the SMIS window as it will lead to inflation. They believe that the rate adjustment is badly timed and counterproductive, as the nation depends a lot on inportation of raw materials, equipment and petroleum products. This will lead to higher cost of all imported goods.

This, however, contradicts the views of the Nigeria Employers’ Consultative Association (NECA), who does not support the exchange rate adjustment at the SMIS window as it will lead to inflation. They believe that the rate adjustment is badly timed and counterproductive, as the nation depends a lot on importation of raw materials, equipment and petroleum products. This will lead to higher cost of all imported goods.  



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