While Naira Falls, what future for Nigeria?

Nigeria’s foreign exchange reserves fell to $38.59 billion as the Central Bank of Nigeria (CBN) continued its management of the currency float which had seen the apex bank inject $3.36 billion into the currency market. changes (forex) over a period of two months.

The apex bank’s January monthly report on “foreign exchange market developments” showed that $1.71 billion and $1.65 billion were injected in December 2021 and January 2022, respectively.

Latest figures from the parent bank said foreign exchange reserves depreciated by $125.53 million to close over the weekend at $38.63 billion.

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The latest drop in foreign exchange reserves could be attributed to the CBN’s continued intervention in the foreign exchange market to ensure the stability of the local currency.

Despite the interventions, the naira continued to depreciate, closing, as in the week before last, at 610 naira for the dollar on the parallel market, a drop of 0.7%. At the official Investors and Exporters (I&E) counter, the naira fell 0.1% to 419.50 naira to the dollar.

It should be noted that the naira had previously made marginal gains after the Monetary Policy Committee (MPC) raised interest rates by 150 basis points.

The local currency appreciated from N/$610 to N/$605, representing a gain of N5 after the MPC raised the Monetary Policy Rate (MPR) from 11.5% to 13% per month. year.

The naira however is still trading weaker than the pre MPC close of N/$600 in the parallel market, but remains stable at N/$415.72 in the official market.

Forex Trader, AZA Finance, Ikenga Kalu said, “We expect the naira to appreciate further in the coming days to return to N600/$. However, tensions are likely to persist over the medium term given ongoing dollar supply constraints. »

The CBN said its naira-for-dollar policies of incentives, stopping sales of dollars at foreign exchange bureaus (BDCs) and restricting foreign exchange sales to 43 items that can be produced locally are aimed at boosting dollar liquidity and creating a monetary convergence.

CBN Governor Godwin Emefiele explained that Nigeria, like other emerging countries, was dependent on oil exports, saying the withdrawal of foreign portfolio investors had significantly affected the currency supply.

“With our declining foreign exchange earnings and successive exchange rate adjustments, the CBN has continued to implement a demand management framework, designed to bolster the production of items that can be produced in Nigeria and contribute to conservation of our external reserves. ”

Emefiele further disclosed that the CBN has continued to promote gradual liberalization of the foreign exchange market in order to smooth exchange rate volatility and mitigate the impact that rapid changes in the exchange rate could have on key macroeconomic variables. .

For his part, an economist and Managing Director of Financial Derivatives Company Limited, Bismarck Rewane, explained that the CBN’s efforts in naira convergence would help reduce the official parallel market gap, which in turn would reduce the impact of speculative transactions on the parallel market.

“A reduced spread would decrease the incentive (arbitrage) for speculators to obtain currency in the official market and resell it in the parallel market. decline in demand for currencies and the appreciation of the dollar on the parallel market.

Rewane said narrowing the spread between official rates and parallel market rates is likely to reduce demand for currencies in the parallel market, pushing investors and traders to the official market. This would lead to an increase in foreign exchange transactions in the official market.

He explained that the wide spread of the official parallel market and the low supply of currencies in the official market had been the main factors that prompted investors and traders to source currencies at a high rate from the parallel market.

For him, the reduction of this gap, combined with an improvement in the supply of currencies on the official market, would reduce uncertainty (volatility) in the foreign exchange market and strengthen the ability of the official window to meet a higher demand. dollar high.

The resulting impact is that reduced exchange rate volatility and a better currency supply would make it easier for foreign investors to repatriate their funds.

It would also ensure that traders and manufacturers access forex at a uniform rate in both official and shadow markets.

“The reduced volatility of the naira and the improved foreign exchange supply are positive for foreign direct investment and foreign portfolio investment as well as for the country’s foreign trade. This is due to the increase in the volume of dollars available for foreign trade and investment. he nodded.

One may wonder why the BDC is still relevant, recognized and seemingly powerful in the Nigerian money market, despite several calls for its eradication. The persistent occurrence of such an unwarranted and illicit practice has over the years made the country’s foreign exchange market laughable and pitiful, to the detriment of its economy.

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