Highlighting the fundamental issues, he said: “The Naira is on a continuous fall due to the following: Limited Supply of Dollar: Nigeria’s major source of Foreign Exchange (FX) is crude oil exports. Nevertheless, crude oil production has fallen short of OPEC’s quota due to several challenges, resulting in a reduction in FX earnings.
There is heightened uncertainty in the currency market over the fortunes of the Naira this week, with investment analysts highlighting factors that will trigger further depreciation as well as the impact on Nigerians and the economy.
While noting that the 61 per cent depreciation of the Naira last week has worsened confidence in the national currency and would lead to a further rise in the cost of goods and services as well as an increase in debt service, they warned that risks of further depreciation exist until the Central Bank of Nigeria, CBN curtails growth in money supply, punishes currency manipulators and clears the backlog of mature dollar obligations estimated at $5 billion.
External reserves
Meanwhile, the nation’s external reserves, a major indicator of future exchange rate of the Naira, rose by 3.6 per cent to $33.35 billion in January, reversing a five-month decline that started in August.
Data from the CBN showed that the external reserves rose to $33.35 billion on January 30th from $32.192 billion in December last year.
This is in sharp contrast to the persistent decline recorded in the external reserves in 2023. The reserves declined all through the months of 2023 except for the very marginal increase in October.
Consequently, the reserve closed the year at $32.192 billion, a 13.2 per cent or $4.89 billion loss from $ 37.082 billion it recorded at end of 2022.
The increase in external reserves which also signifies improvement in foreign exchange inflow during the month may not be unconnected with the rise in the price of Nigeria’s crude oil grade, Bonny Light, to $84.41 per barrel at the end of January from $79.4 per barrel at the end of December as well as the increase in oil production in the second half of the year.
Volume of Dollars traded, Naira value down
On the other hand, the volume of dollars traded (turnover) in the Nigerian Foreign Exchange Market, NAFEM, fell by 3.2 per cent, month-on-month (MoM) to $2.14 billion in January 2024 from $2.21 billion in December.
Vanguard analysis of weekly transactions in NAFEM as published by FMDQ showed a steady flow and ebb throughout the month of January.
Why Naira fell by 61% in official market
Notwithstanding the rise in external reserves, the Naira fell to its lowest level last week following 61 per cent, week-on-week, WoW depreciation to N1,435.53 per dollar in the Nigeria Foreign Exchange Market, NAFEM, as a result of measures introduced by the CBN, which analysts say will lead to price discovery in the forex market.
While the Naira also depreciated by 2.9 per cent to N1,440 per dollar in the parallel market, the sharp depreciation of the Naira in the NAFEM, however, reduced the gap between the exchange rates in the market to N4.35 per dollar from N508.1 per dollar the previous week.
Why sudden crash in Naira value
Describing what triggered the 61 per cent depreciation of the Naira in NAFEM, Co-Founder, Comercio Partners Limited, Nnamdi Nwizu, said: “It was market forces at work, alongside the government.
The CBN decided to tackle the illegal transactions in the market that were distorting real market transparency, but getting banks to truly show where trades were being consummated, versus the trend where some close trades at N900/$ then cut checks for N300 to make the total price N1,200/$ and in the end, the NAFX fixing will show N900/$, versus the true price of a N1,200/$.”
Similarly, Ibukun Omoyeni, Economist, Vetiva Capital Management Limited, said, “We saw another sizable devaluation at the Nigerian Autonomous Foreign Exchange Market (NAFEM) following a circular clamping down on under-reporting of transaction rates at the NAFEM. Thereafter, the apex bank also clamped down on the bank’s appetite for foreign currency exposure by ensuring matching of assets and liabilities in the same currency to prevent speculation.
“We believe these measures are to aid price discovery in the official market, and also prevent sizeable foreign exchange gaps from re-emerging.”
Impact on economy
On the impact of the depreciation of the Naira, Dr. Sylvester Anaba, Team Lead, Research, United Capital Plc, warned that the implication of a weak Naira will include:
“High cost of imported items, thus fueling inflation in the country; Consumers’ purchasing power will continue to be eroded and standard of living will continue to nosedive;
“Companies that depend on imported raw materials will continue to struggle with high costs, potentially reducing their profitability and competitiveness. This can lead to job losses and or price increases;
“A weaker Naira will facilitate uncertainty in the economy and foreign investors will become; disinterested in investing in the economy. This will limit the flow of foreign exchange and hinder economic growth;
“The country, firms and individuals that borrowed in foreign currency will need more Naira to repay their debts as well as the interest rates thereon;
‘‘The continuous weakening of the Naira will increase the debt servicing burden of the country, firms, and individuals.”
Similarly, Nwizu stressed that with higher exchange rates will come higher inflation.
“We are also getting to the point where Nigerians are losing faith in the Naira and we are getting to a dollarized economy. If the monetary authorities do not stem the depreciation tide, it will be difficult to rebuild confidence in the Naira again”, he stated.
Impact of Foreign investment
Anaba also highlighted how the recent Naira depreciation will impact foreign investment inflow to the country, saying, “Foreign investors report their returns in Dollar terms. A weak Naira will consequently shrink the Dollar value of their return on investments. This makes Nigerian investments less attractive compared to other options, potentially deterring new inflows, and even leading to the exit of foreign investors and withdrawal of funds from the Nigerian markets.
“Increased volatility in the exchange rate creates uncertainty for investors, making it difficult to assess risks and returns accurately. This can further discourage investment, especially for long-term projects.