Market News

•Depreciation, and market  distortion continue 

Apprehension over the fate of Nigeria’s local currency, the Naira, has heightened with recent pressures on the nation’s external reserves. Over the years such pressures have resulted in constant depreciation and devaluation of the Naira against the world’s major currencies.

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As of last week the exchange rate at the Investors and Exporters (I&E) window, the official foreign exchange, forex, window of the local forex market, hovered around N436/ USD1.00. In the parallel market which, more than I&E rates, influences the pricing of goods and services in the open market, the rate was as high as N710.

This rate scenario clearly indicates a hugely challenged forex system.

As Nigeria marks its 62nd independence anniversary, the declining fortunes of the national currency appear to have worsened, as the parallel market premium (the difference between the official and parallel market rates) is seen at 63 per cent, the highest in 17 years. 

In addition, the figures also show that the parallel market exchange rate in 2022, rising from N580 at the end of December 2021, translated to a 22.4 per cent depreciation of the Naira, just before the end of the third quarter of 2022.

This also indicated that the parallel market premium in 2022 alone widened by almost 30 percentage points to 63 per cent from 33.3 per cent at the end of 2021. The premium is also 58 percentage points higher than the 5.0 per cent benchmark recommended by the International Monetary Fund, IMF. 

Further analysis showed a steady rise in the premium since 2012 when it closed at 1.1 per cent. 

Driving factor

While the root cause of the worsening fortunes of the naira remains the over-dependence on one product, crude oil, for foreign exchange earnings, the latest decline is driven by a continuous acute scarcity of dollars, which was first triggered by the slump in crude oil price occasioned by the economic lockdown to curb the COVID-19 pandemic, and then worsened by fuel importation and fuel subsidy cost which robbed the economy of much-needed dollar revenue. As a result, earnings from crude oil exports fell 26.65 per cent to $35.15 billion in 2021 from $47.94 billion in 2019, and fuel imports rose by 24 per cent to $13.61 billion in 2021 from $11.02 billion in 2019, according to figures from the Central Bank of Nigeria, CBN. 

Furthermore, the average monthly remittance by the Nigeria National Petroleum Corporation Limited, NNPCL, fell by over 1000 per cent to $300 million this year from $3.4 billion in 2014. 

Restrictions

In response to the acute shortage of dollar supply in the economy,   the CBN, introduced further foreign exchange restrictions, in addition to the ones introduced in 2015. For example, the 41 items under the forex ban imposed in 2015 were increased to 43, while the limit on international transactions using naira debit cards was further reduced to $20   from $100 per month. The CBN also imposed limits on international transfers from domiciliary accounts funded through cash lodgements. 

In addition to these, the CBN July 2021, stopped dollar sales to bureaux de change, BDC, operators, a development which worsened dollar supply in the retail segment of the forex market. 

The above restrictions, combined with the inability of the CBN to meet the demand for dollars in the official market, triggered increased dollar demand in the parallel market, as end users, including corporate organisations, rely on the market for their dollar needs. 

“Top manufacturers are complaining about limited forex supply”, said Bismarck Rewane, Chief Executive Officer, Financial Derivatives Company. 

He added that top manufacturers receive only 5.0 per cent of their total forex needs from CBN as of the end of August 2022, down from 25 per cent from August 2021.

The rising demand for dollars is further aggravated by development in the global economy as well as pre-election spending in Nigeria. 

Alluding to this fact, analysts at Comercio Partners, a Lagos-based investment banking firm, said: “Some of the macroeconomic vulnerabilities attributable to the decline in the local currency to the dollar during the review month include FX market illiquidity spurred by weak FX inflows, sell pressures from foreign investors in the capital market, hawkish monetary policies in developed nations, pre-election jitters and ravaging insecurity. Other factors include worsening net capital flows and a burgeoning import bill.”

Inflationary Impact

Given the country’s import-dependent nature, with almost everything imported, the sharp depreciation of the naira in the last two years, among other factors, led to a steady rise in prices of goods and services. This resulted in the eight consecutive month rise in the inflation rate to 20.52 per cent in August, the highest in 13 years.

This mirrors a World Bank study which shows that countries with parallel market exchange rates are notoriously inflationary.

“Of the 20 countries   (including Nigeria) with the highest inflation rates for 2021, more than three-quarters have parallel markets. From January 2020 through December 2021, the probability of 12-month inflation rates 40 per cent or higher for countries with parallel exchange rates is about 36 per cent”, said World Bank economists Juan Yacoub,  Nada Hamadeh and Carmen Reinhart in a study titled “The pitfalls of parallel currency markets: higher inflation and lower growth”.

Furthermore, the sharp depreciation of the naira, and the 63 per cent premium between the official and parallel market exchange rate, prompted increased forex malpractices including hoarding, speculation and forex round-tripping. 

Saving the naira

Though analysts project that the downward fortune of the naira will continue for some time, they, however, opined that the situation is not hopeless.

While insisting that the long-term solution lies in the diversification of the nation’s dollar earnings away from crude oil, they also cited short-term measures that can bring immediate reprieve to the naira. 

In this regard, Peter Elege, Chief Executive Officer, PFI Capital, said, “Policy options the government should aggressively pursue to bring respite to the depreciation of the exchange rate include reduction or possible removal of fuel subsidy, curtailing crude oil theft and harmonization of the various exchange rates to prevent forex racketeering.

“Apart from dipping into reserves and ramping up its interventions to support the currency, I’m not convinced there is much the CBN can do to stop the rapid decline of the naira over the next two weeks”, said  Tunde Abidoye, Head, Equity Research.

  “As with any currency, the value of the naira primarily depends on supply and demand factors. Although administrative measures such as fx restriction on certain items can be utilised to temporarily stop the slide, the primary remedy still resides with the amount of forex liquidity in the system.

“What we have seen in recent times is a classic case of very low liquidity in the fx market, mainly due to several factors including the low level of export earnings, and increased demand from the political class as the election cycle gradually winds down.”

On the long-term measures needed to help the naira, Abioye said: “The nation needs to start seriously considering medium- to long-term solutions, which would mean creating an environment – i.e. improving electricity, infrastructure – that encourages export diversification, especially for enterprises that are export-led in manufacturing, commodities, and agro-processing, among other industries. Services industries including health, education, and information technology must also be taken into consideration.”