Increased demands for foreign exchange for foreign travel, school fees, and the planned food import duty waiver have pushed the naira to a fresh depreciation spree in the week ended.
The Nigerian currency, which had opened September on a positive note across the segments of the currency market, weakened by Tuesday on the back of heightened demand.
On the unofficial market, the naira had been quoted at N1,635 on Monday; however, by Tuesday, it had worsened to N1,640, according to some Bureau De Change operators in Lagos.
As of Friday, a BDC operator, Musa Abbah, said he sold dollars at the rate of N1,670 and bought at N1,665.
Asked about the sharp increase, he said, “Dollar has gone up since yesterday. Dollar is scarce in the market.”
On the official Nigerian Autonomous Foreign Exchange Market domiciled on the FMDQ Securities Exchange, the naira gained 0.81 per cent or N12.79 as the dollar was quoted at N1,585.77 compared to N1,598.56 quoted in the previous trading session.
At the close of trading on Thursday, the naira stood at N1639.41/$, marking a 0.83 per cent decline or N13.53 depreciation in the value of the naira between the two trading periods.
The volume of traded dollars also dropped by 9.7 per cent to $185.79 from $205.76m on Wednesday.
FMDQ data on Friday indicated that the naira closed at N1593.32/$, a 2.81 per cent appreciation from N1639.41/$. The daily turnover also rose to $245.17m from a low of $185.79m.
Asset management firm, Afrinvest, in its monthly market report for August, had projected that the naira would be under pressure if supply was not boosted.
“In the absence of a significant inflow to boost FX supply, we expect the naira to be pressured in the month, due to the seasonality effect, as PTAs and BTAs demand peaks,” a portion of the report read.
In terms of foreign exchange inflow, the Governor of the Central Bank of Nigeria, Olayemi Cardoso, in an interview with Bloomberg TV in London in June, disclosed that the country recorded a total foreign exchange inflow of about $24bn in the first quarter of 2024.
While there is no data for subsequent months, the apex bank in August announced that in July, it recorded a significant increase in remittance to $553m, a 130 per cent increase from the same period in 2023.
“This figure represents the highest monthly total inflows on record and reflects ongoing efforts by the CBN to enhance liquidity in Nigeria’s foreign exchange market,” the CBN said in a statement.
Meanwhile, Nigeria’s foreign capital inflow has decreased to $770m in the fourth month of 2024, marking a decrease of 57.22 per cent from the $1.80bn recorded in March 2024, according to the April 2024 Monthly Economic Report published by CBN.
The report attributes the decline in foreign capital inflow primarily to a reduction in investments in money market instruments.
Rating firm, Agusto & Co., submitted in its latest insights on the Gross Domestic Product that with the liberalisation of the foreign exchange market in June 2023, the performance of the oil sector has become even more critical to maintaining exchange rate stability in the near term.
The Head of Financial Institutions Ratings at the firm, Ayokunle Olubunmi, said, “This period is one the periods that you have the highest demand for forex in Nigeria. One, you have people who are in foreign schools and would need to pay for their school fees. There are people also going on holiday. Also, businesses start to restock in preparation for the ‘ember’ period. So, the demand is high.
“The main issue has to do with our source of FX as a country. Unfortunately, we have not been able to expand it significantly. Our crude oil production has not been great, and that is primarily our main source as non-oil exports have not been a significant contributor to forex.”
The Chief Executive Officer of Economic Associates, Dr Ayo Teriba, postulated that the planned food import duty waiver had compounded the situation.
He said, “I had been worried that this would happen when the government started talking about duty waiver for food importation for 180 days. So, you can see the demand by those who want to take advantage of the duty waiver and source for foreign exchange in the market in the face of limited supply and that is explaining the latest round of weakening of the exchange rate.
“During these 180 days, those who were not importing food before may want to take advantage of the policy incentive to import, thereby, putting pressure on the foreign exchange market. This was what I was worried about when they were piloting those policies, and now, it seems the chickens are coming home to roost.”
Teriba dismissed the claims that there was enough supply in the market, saying, “What is the evidence that there is enough supply? You can hear that NNPC owes billions of dollars and NNPC is owed by the government. So, if they can’t pay that debt to parties that we are dealing with, who is talking of enough supply?”
Recall that on Friday night, the CBN announced the sale of dollars to Bureau De Change operators following days after the Nigerian Naira has been taking a beating at both the official and parallel market where it depreciated to about 1,670/$ on Friday.
The circular partly read, “This is to inform the Bureau De Change Operators and the general public that we are providing more liquidity into the market. To this end, the CBN has approved the sale of US$20,000.00 to each eligible BDC at the rate of N1,580/$. This is to meet the demand for invisible transactions.”
The National President of the Association of Bureau De Change Operators of Nigeria, Aminu Gwadebe, in an interview with Sunday PUNCH, disclosed that even without the promised liquidity in the system, the depreciation of the naira had eased on Friday.
He maintained that it was essential for the CBN to provide liquidity in the market as it boosts market confidence.
“The problem is the inflation. Once there is inflation, the dollar is used as a store of value. That is one aspect of the public, and you cannot also rule out the demand from the government side and rule out the demand from the reinstated 42 items. Those are sources of pressure on the limited supply in the market.
“Of course, the food import waiver is a factor. Every businessman would want to utilise the opportunity, so there is an additional source of pressure,” he stated.
Gwadebe added that the practice of some state governors turning their federal allocations into dollars, which is another source of pressure, was a practice that had been going on for a long time.
A former Chief Economist at Zenith Bank, Marcel Okeke, also echoed the opinion that heightened demand for FX due to travel and school fees has an impact.
“Part of it is the fact that people are going for summer, people are paying school fees amid inadequate supply. The other side of the supply is we are not getting enough Foreign Direct Investment. You can get Foreign Portfolio Investment, and they go out, but when it comes to bringing in real money in dollar terms or hard currency, we don’t see that which compounds the supply side challenges,” he said.
