The Nigerian Naira is grappling with a fast burn fall against the US Dollar, particularly in the parallel market, where it trades at a premium compared to the relatively stable official exchange rate. As of August 10, the Naira’s value stood at N955 per Dollar in the parallel market and N781.34 in the I&EFX window, highlighting a notable N174 spread between the two rates. The spread questions the optimism of monetary policy authorities over convergence. While BMI (fitch solutions) analysts foresee a partial Naira recovery by year-end, other analysts anticipate further weakening to N1000/US$ due to heightened seasonal demand
Beyond seasonal effects, the Naira’s challenges encompass availability and negative arbitrage issues. Although the negative arbitrage concern has dissipated, scarcity of foreign currency persists due to multiple demands, including the importation of petroleum products, foreign loan repayments, education expenses abroad, and procuring imported goods. Exacerbating the problem is the challenge of the theft of crude oil, Nigeria’s major source of export proceeds. The resulting impact is a consistent fall in foreign reserves. This becomes even more troubling considering that the recently released Central Bank of Nigeria (CBN) financial statement for 2022 suggests that the country’s reserves, after adjusting for the country’s existing liabilities to third parties, was only US$13bn. A prevalent lack of confidence in the Naira has prompted Nigerians to opt for US Dollar savings.
Economists emphasize the need for judicious and precise employment of monetary policy tools to prop the Naira’s value, as its response varies depending on the economic agent the FX demand springs from. While Open Market Operations (OMO) and Cash Reserve Ratio (CRR) adjustments govern the cash in the bank; the demand by Pension Fund Administrators (PFAs) reacts to bond rates. Importers and corporations tend to be sensitive to the dynamics of the Importers’ and Exporters’ Foreign Exchange Window (I&E supply).
