2023-10-27 13:19:50
The Nigerian naira is on the verge of crossing the $1,000-to-the-dollar mark, following falling to a record low of $999 last week, according to Refinitiv data, due to its weakness in the unofficial market where it is freely exchanged.
President Bola Tinubu removed foreign currency controls in Nigeria in June, to revive transactions in the official market and unify the naira exchange rates.
But this measure only fueled currency weakness and inflationary pressures.
Here’s what you need to know regarding the naira.
WHY IS THE NAIRA FALLING?
The central bank has built up demands for foreign exchange in the official market, forcing individuals and businesses to turn to the black market if they need dollars.
However, dollar flows to Nigeria have declined in recent years due to falling investment and crude oil exports, which represent more than 90% of the country’s export earnings.
Investors welcomed Tinubu’s lifting of foreign exchange controls, hoping that a unified exchange rate would facilitate access to foreign currencies, but this is not yet the case.
HOW BIG IS THE FOREIGN CURRENCY BACKGROUND?
Nigeria has nearly $7 billion in forward foreign exchange contracts in arrears, which companies have purchased from local banks. Banks then repaid the foreign credit lines with their own funds when the central bank failed to pay.
This means businesses are unable to obtain new letters of credit, while banks are owed dollars. New central bank governor Yemi Cardoso said clearing the backlog was a priority, but he did not say how long it would take.
Some analysts say the forward agreements might be extended from 24 to 36 months, giving the central bank more time to find the dollars needed to repay companies.
WHAT IS THE LEVEL OF NIGERIA’S FOREIGN EXCHANGE RESERVES?
The country’s foreign exchange reserves fell to $33.5 billion in September, from $37 billion in January, central bank data showed.
In August, the central bank published audited accounts for the first time since 2018, and revealed its reserves included a $19 billion commitment to derivatives – reducing the liquid amount of reserves.
JPMorgan calculated that the country’s net foreign exchange reserves stood at $3.7 billion at the end of 2022, which is “significantly lower” than earlier estimates.
Nigeria’s surplus crude account has just $473,755, the National Economic Council said in August, down from a peak of $20 billion in 2008 following successive governments withdrew dollars to support the naira and budgetary expenditures.
WILL THE CENTRAL BANK RESTORE OPEN POSITIONS ON THE FOREIGN EXCHANGE MARKET?
Nigerian banks are not allowed to have open positions in the dollar, meaning they cannot buy foreign exchange for their own account in the market or speculate on the value of the currency.
Banks use their net open positions in foreign currencies to finance short-term trade lines without resorting to the central bank for tenders. This means that banks “make the market” for dollars and provide two-way quotes for buying and selling the currency, creating a fully functioning foreign exchange market.
One trader said that if banks were allowed to trade in dollars, the local currency might weaken further because they would sell to customers at rates determined by supply and demand.
Nigeria’s 2024 budget provides for a benchmark exchange rate of 700 naira to the dollar. According to the finance minister, the rate of N1,300 on the parallel market does not reflect the real value of the local currency.
“As the naira remains much weaker in the parallel market, further devaluations – and increases in inflation – are likely,” Capital Economics said in a research note.
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