Naira Extends Depreciation to N1,533.99/$ at official market

The naira on Friday extended depreciation against the dollar falling to N1,533.99 per US dollar on the official market due to a surge in demand for the US dollar.

The local currency came under pressure following the return of FX liquidity scarcity at official and parallel markets.

According to data obtained from FMDQ, the naira depreciated by 5.14% to N1,533.99 per US dollar  at the Nigerian Autonomous Foreign Exchange Market (NAFEM). The naira bulls have disappeared since exchange rate made 360 degree U-turn.

Goldman Sachs had reviewed its expectation that the naira would trade at N1000 per dollar. The investment firm turned bullish on the local currency when exchange rate beat its N1,200 within short time that the firm anticipated.

The Central Bank of Nigeria’s (CBN) drive to boost liquidity across forex market has eased due to US dollar shortage in the economy. FX inflows into the financial market eased, though external reserves have climbed for 16 days since the gross balance hit a low of $32.106 billion on April 19.

But Fitch estimated that around 30% of Nigeria’s reserves are made up of FX bank swaps, although analysts expect most of these to continue to be rolled over. NNPCL has entered into an oil-for-loans swap arrangement that affects accretion into external reserves. The authority plans to borrow more than $2 billion from a multilateral lender, the IMF, in June, 2024 ahead of the US dollar bond sales plan to support the budget deficit.

According to analyst reviews, Nigeria’s external reserves balance remains weak due to existing obligations, and this may have handicapped the apex bank’s ability to support the naira in the forex market. The monetary authority’s willing buyer, and willing seller FX model has been subjected to criticism on an account that the country relies heavily on foreign or imported goods for consumption and industrial use.

In the parallel market, the naira closed at ₦1,520 against the US dollar as demand for foreign currency reduced purchasing power of the local currency. Today, oil prices rally in the global commodity market. Brent crude rose by 0.28% to $82.98 per barrel, while West Texas Intermediate (WTI) crude also increased by 0.45% to $78.99 per barrel.

Global ratings agency, Fitch, recently upgraded Nigeria’s outlook to positive from stable, citing economic reforms under the new administration. The agency noted that efforts to restore macroeconomic stability and boost policy credibility, including exchange rate and monetary policy adjustments, among others.

The Central Bank of Nigeria (CBN) reported that Nigeria’s external debt service grew by 39.70% to USD1.12 billion, up from USD801.36 million in Q1:2023. This surge was driven by the higher cost of borrowing – as rates remain high globally – and the continuous depreciation of the naira.

Notably, the report indicated that Nigeria spent about 70% of dollar outflow on servicing external debt during the period. Analysts expect a further increase in the government’s debt service as the naira depreciates further.

Fitch said greater formalisation of FX activity and monetary policy tightening have contributed to a significant rise in foreign portfolio investment inflows, and a fast appreciation of the naira at the official FX window, following the 71% post-liberalisation depreciation between June 2023 and mid-March 2024, although the exchange rate remains volatile.

However, Fitch views the continued lack of clarity in the size of net FX reserves as a constraint on the sovereign’s credit profile. Nigeria’s foreign reserves peaked at USD34.4 billion in mid-March. With sustained FX injections, and other eligible obligations, gross external reserves fell to $32.106 billion.

“We forecast FX reserves to fall to 4.2 months of current external payments in 2024, from 4.4 months at the end of 2023,” Fitch said.

Nigeria’s external reserves remain weak given the import-dependent nature of the local economy and private sector activities. Analysts feel the net FX reserves balance is shrouded in secrecy.

“Uncertainty continues over the net FX reserve position, with a particular lack of clarity on near USD32 billion of “FX forwards, OTC futures, and currency swaps” recorded as an off-balance sheet “commitment” in CBN’s last consolidated financial statement for 2022”, Fitch said in its latest rating update.  CPPE Advocates Flexible Monetary Policy Stance to Address Inflation.

May 17, 2024