Naira Skids as Rising FX Demand Tests ‘Willing Buyer, Willing Seller’ Model
The Naira depreciated against the dollar due to persistent US dollar scarcity. Increased demand for FX has tested to test the effectiveness of Nigeria’s willing buyer, willing seller FX model despite the nation’s dependency on imports.
According to information obtained from FMDQ Securities Exchange, the naira depreciated by 0.8% to N1,478.11 at the Nigerian Autonomous Foreign Exchange Market (NAFEM).
In the parallel market, exchange rate has also worsened amidst delay in FX auction sales to currency traders in the informal segment to meet invisible demands.
Exchange rates movement over the past few weeks has shown the Central Bank of Nigeria (CBN) has been handicapped in making further US dollar injections into the forex markets. Analysts said it is now obvious that naira past wins was driven by FX liquidity supported by the CBN.
Though, the apex bank denied backing up the local currency, emphasizing a willing buyer, willing seller FX model has come to stay despite import dependent nature of the Nigerian economy.
worsening exchange rate is expected to drive inflation. higher further and unless it is tamed, consumer price index may persist up until second half of the year.
“At present, the major worries remain inflation and the exchange rate, with the naira’s journey to price discovery fraught with volatility and wild swings, particularly in the last four months.
“After a plunge to a record low of ₦1,950/$ at the parallel market, the currency staged a dramatic comeback, rallying by 46.2% to ₦1,030/$ by April 17, to become one of the world’s best-performing currencies in recent weeks”, Agusto Ratings said in its latest commentary note.
Analysts noted that the turnaround followed the aggressive tightening stance of the CBN, with policy rate hikes in February and March (of a combined 600 basis points), the success in clearing the backlog of FX obligations and a flurry of directives, particularly the ban on foreign currency denominated collateral for naira loans.
“The CBN has also intervened to improve liquidity and higher interest rates have attracted ‘Hot Money’, which bolstered the naira and gave the apex bank more ammunition to influence the market. We believe increased inflows from foreign portfolio investors attracted by higher interest rates as a key factor in the naira recovery.
“Nonetheless, there is a sense of caution that these are likely existing investors familiar with the Nigerian market, rather than a surge of new money. Another point of contention is the central bank’s commitment to a free-floating exchange rate”, Agusto Rating stated in its update.
It added that despite pronouncements of a “willing buyer, willing seller” market, the bank has resumed selling dollars to licensed FX dealers with a limited spread of 1.5%.
The naira’s rally has also coincided with a 6.5% depletion of the CBN’s external reserves since March 2024, leading to suggestions that the Apex Bank has been supporting the naira more than previously disclosed and raising questions about the sustainability of the naira’s rally.
“While the CBN maintains it is not defending the naira, reserves depletion has stoked scepticism and renewed speculative activity, which is at the core of the resurgent pressure on the naira in the last week. In the eight days between April 17 and April 25, the naira lost 28.9% at the parallel market – from ₦1,030 to ₦1,450, respectively, despite the CBN’s intervention with $10,000 to each of the 1,583 Bureau de Change operators at a rate of N1,021/$”, Agusto stated. Price Crude Oil in Naira to Strengthen Local Currency, Expert Advises FG
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