CEM REPORT, CURRENCY | The Nigerian Naira experienced a significant depreciation on Monday, April 29th, 2024, reaching its weakest point since March 22nd of this year. On the official Nigeria Autonomous Foreign Exchange Market (NAFEM) platform, the exchange rate closed at ₦1,419/$1, marking the eighth consecutive weakening of the Naira since it appreciated to ₦1,072/$1 earlier in 2024.
This depreciation has raised concerns among Nigerian businesses and individuals who rely on a stable exchange rate for imports, international transactions, and foreign investment.
NAFEM Market Sees Naira Slide
Financial analysts expressed concern over the Naira’s depreciation stating that this is the first time the exchange rate surpass the ₦1,400 threshold since March, representing a substantial decline from the gains made earlier this year.
Data from FMDQ Securities Exchange, the official platform for foreign exchange trading in Nigeria, revealed that the exchange rate closed at ₦1,419/$1 on Monday, April 29th, compared to ₦1,339.23/$1 on Friday, April 26th. This translates to a depreciation of roughly 6% within just three trading days.
The intra-day movements were equally volatile, with the Naira trading as high as N1,450/$1 and as low as ₦1,160/$1 during the day.
Forex Turnover Dwindles
Adding to the concerns is a noticeable decline in forex turnover on the official market. Total forex turnover for the day was recorded at $147.83 million, a significant drop from the $309 million recorded on the previous Friday.
This suggests a decrease in dollar liquidity within the official market, potentially further contributing to the Naira’s depreciation. Furthermore, forex turnover for the entire month of April currently sits at $3.2 billion, with only one trading day remaining. This is considerably lower compared to the $5 billion recorded in March, indicating a sluggish official forex market.
Parallel Market Offers Limited Relief
While the official market paints a concerning picture, the situation on the parallel market, where the exchange rate trades unofficially, offers a marginally brighter outlook. CEM gathered that the naira is exchanging between ₦1,350-N1,400/$1 on the parallel market. This is marginally stronger than the rate on the official NAFEM platform.
However, it’s crucial to acknowledge that the parallel market is often less transparent and more susceptible to manipulation. Therefore, the slight premium offered on the parallel market may not be a sustainable solution for Nigerians seeking foreign exchange.
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External Reserves
The recent depreciation of the Naira occurs amidst a backdrop of gradually rising external reserves. Nigeria’s external reserves currently stand at $32.13 billion, which is marginally higher than the $32.109 billion reported last week.
While rising external reserves are typically viewed positively, analysts caution that the current level may not be sufficient to defend the Naira from persistent depreciation pressures.
Factors Driving the Depreciation
Experts attribute the recent decline in the Naira’s value to a confluence of factors:
Rising Demand for US Dollars: Increased demand for US Dollars from businesses and individuals for imports and foreign travel is putting a strain on the Naira’s supply.
Stronger US Dollar: The US Dollar has been strengthening against other global currencies in recent months, making the Naira relatively weaker.
Elevated Inflation Rates: Nigeria’s inflation rate remains elevated, currently hovering around 18%. This reduces the purchasing power of the Naira and makes it less attractive to hold compared to the US Dollar.
Lower Forex Turnover: The significant drop in forex turnover on the official market suggests a decrease in dollar liquidity, which can further exacerbate the depreciation of the Naira.
Looking Ahead
The future trajectory of the Naira remains uncertain. currency analyst believes that “volatility in the exchange rates is likely to persist due to the interplay of market forces.”
The Central Bank of Nigeria (CBN) may intervene by selling dollars into the official market to increase liquidity and stabilize the exchange rate. However, the effectiveness of such interventions depends on the CBN’s dollar reserves and its ability to manage inflation.
