CEM REPORT, CURRENCY| The Nigerian Naira experienced a significant blow on Thursday, May 16th, 2024, as its exchange rate against the US Dollar plummeted by a staggering 4.89%. This sharp depreciation, from ₦1,459.02/$1 on Wednesday to ₦1,533.99/$1 on Thursday, paints a concerning picture of instability in the foreign exchange (Forex) market.
After a string of losses, the exchange rate managed to close stronger on Wednesday. However, this positive development proved to be short-lived. Thursday’s drastic decline represents the lowest exchange rate recorded for the Naira so far in May 2024.
Erratic Market Dynamics
The trading dynamics on Thursday further highlighted the unpredictable nature of the FX market in Nigeria. During intra-day trading, the exchange rate experienced dramatic swings. A temporary surge in dollar sales pushed the rate up to a high of ₦1,590/$1. Conversely, periods of heightened buying pressure on the Naira led to an intra-day low of ₦1,399.20/$1.
These sharp movements within a single trading day reflect a significant level of uncertainty and volatility, making it incredibly difficult for businesses and investors to make sound financial decisions.
Road Ahead
Addressing the current situation requires a multi-pronged approach. Experts are urging the Central Bank of Nigeria (CBN) to implement effective policies that promote increased FX inflows and encourage domestic production. Additionally, greater transparency in the Forex market is crucial for fostering trust and promoting stability.
FX Liquidity
The Naira’s depreciation coincided with a notable shift in Forex turnover. While Wednesday witnessed a significant increase in Forex activity, with turnover surging by 124.56% to reach a commendable $289.14 million, Thursday saw a slight decline of 5.63%, bringing the turnover down to $272.86 million. This squeeze in Forex liquidity likely played a significant role in the Naira’s rapid devaluation on the official market.
When the availability of foreign exchange diminishes, it creates a scenario where demand outstrips supply. This imbalance in the market often leads to a rise in exchange rates, as witnessed on Thursday. The limited access to foreign currency puts immense pressure on the Naira, causing its value to fall.
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If You Ask Me
The significant depreciation of the Naira is bound to have a ripple effect across various sectors of the Nigerian economy. Businesses that rely on imported goods and services will likely face increased costs due to the higher exchange rate. This could translate to higher prices for consumers, potentially leading to inflation. Investors, both domestic and foreign, may also become apprehensive due to market uncertainty, potentially hindering investments and impacting economic growth.
The recent plunge in the Naira’s value serves as a stark reminder of the need for proactive measures to ensure long-term stability in the Nigerian FX market. Addressing underlying economic issues, implementing sound monetary policies, and promoting market transparency are necessary steps towards a more resilient and predictable foreign exchange environment.
