Why the Naira depreciated by 23% last week

The Central Bank of Nigeria, or CBN, issuing slow forex disbursements to BDCs, which has resulted in a surge in demand for dollars from banks and end users in the parallel market. This has caused the Naira to fall by 23% against the dollar last week, marking the worst weekly performance of the Naira since February.

Currency dealers and analysts were unsure about the Naira’s fortunes this week, citing the pace and speed of CBN intervention as a determining factor. However, on Friday, the CBN intervened in the official Nigeria Foreign Exchange Market, or NAFEM, saving the Naira. As a result, the Naira appreciated in the parallel market.

The Naira last week declined by N285(25%) over the course of four days, to N1,405 per dollar on Thursday, April 25, after two months of continuous gain to N1,140 on Friday, April 19, from N1,1,820 per dollar on Wednesday, March 21.

The Naira fell by N169.24 (9.9%) to N1,339.23 per dollar on Friday, April 26, from N1,169.99 per dollar on Friday, April 19, following the same pattern in the official market.

Currency exchange rate disparity

According to Financial Vanguard’s findings, a number of reasons, including shrewd behaviour fostered by the parallel market’s cheaper exchange rate, contributed to the Naira’s gradual decline in value.

The parallel market exchange rate has been lower than the official market exchange rate ever since the CBN started selling dollars to Bureaux De Change, or BDCs. For instance, on Friday, April 19, the official rate of N1,234.49 per dollar was N64.5 higher than the parallel market rate of N1,120 per dollar.

Banks pounced on the black market, purchasing dollars at a discount and reselling them to clients at the official exchange rate, which was higher, in order to take advantage of this disparity.

Some forex end users acquired dollars on the black market, put them in their domiciliary accounts, and then sold them to the banks at the higher official rate, following the banks’ lead.

Currency dealers also cited the slow pace of dollar disbursement to BDCs by the CBN. They noted that dollar disbursement to BDCs comes in trickles, with some BDCs not getting dollars for more than two weeks after naira payment to the apex bank.

Confirming this to Vanguard, President, Association of Bureaux De Change Operators of Nigeria, Dr. Aminu Gwadabe, said: “The depreciation of the dollar was caused by two factors. The first was that people were buying from the open (parallel) market, deposit the dollars in their domiciliary accounts and sell in the interbank market and this is because the open (parallel) market rate is always lower than the interbank market rate.

“The second factor is that we have seen the resurgence of Person-to-Person, P2P, where hedging, margin trading is taking place.

“After nipping in the bud of Binance, other platforms sprang up. And you know transactions in those platforms are purely speculative. The likes of Binance can only be profitable at the expense of naira depreciation because it is a market that you buy low and sell higher.”

Scant FX supply in official market

Investigation also revealed the situation was aggravated by the absence of CBN intervention in the official market for some weeks while inflow from Foreign Portfolios, FPIs also dwindled.

Explaining this development, Nnamdi Nwizu, Co Founder Comercio Partners, a Lagos based investment bank, said: “Until yesterday (Friday) when they intervened, CBN had not intervened in the interbank market for weeks, and inflows were drying up.

“Also forex demand that waited for Naira to strengthen (appreciate) seems to be filtering through now, both local and FPI’s.”

On the outlook for the Naira in the coming weeks, Nnamdi said: “A lot depends on if the CBN continues to intervene in the market to ensure that they don’t lose control of the market. And also if we start to see renewed FPI flows.”

CBN intervenes

In a bid to arrest the depreciation of the Naira, CBN intervened in the official market on Friday. It also increased speed of dollar disbursement to the BDCs, while also stepping up enforcement activities with its monitoring task force which visited some BDCs and parallel market locations in Abuja and Kano on Friday.

As a result the Naira appreciated in the parallel market on Friday to N1300 per dollar from N1,405 per dollar on Thursday.

Confirming this development, Umoru Ahmed, a currency dealer based in Lagos Island said: “The naira was traded at N1,500 this morning of which I bought. There is no inflow of dollars like before and not all the BDCs have access to dollars especially if they registered late.

“The rate later crashed today to N1,300 per dollar for selling and N1,250 for buying.

“This is because the CBN’s taskforce stormed the market today arresting many black market traders which led to many operators reducing their price to sell of their dollars as they don’t know what the market will be like tomorrow.”

Similarly, Isa Yahaya, a currency dealer in Ikeja said: “In Ikeja today, we bought at N1,320 and sold at N1,350. But the market opened today at N1, 450 per dollar of which I bought a dollar for N1,550.

“But we received hint that the CBN’s task force was arresting many black market traders. This led to the appreciation of the naira because we just wanted to quickly sell what we had and wait till tomorrow to see what the market holds.

“The increase in the rate is due to demand pressure. The number of people demanding for dollars is higher than those selling.

“So it is difficult to meet the demand as we do not have access to buying from BDCs talk of from the CBN.”

Also confirming this development and expressing optimism that the naira will further appreciate this week, Gwadehe said: “There is a turn of events now. Naira is appreciating as we speak, the rate has come down to N1,250 – N1,270

“Now the rate is going down due to combination of factors. The CBN has intervened today at the NAFEM market. Dollar sales and disbursement to BDCs have been coordinated and streamlined for efficiency and liquidity.

“The securities agencies have swooped on those illegal behaviours, arrest were made today in Abuja and Kano. So all these factors are playing a bigger role because all the behaviors that have no economic value have been checkmated and streamlined. So I believe appreciation of the Naira cannot but continue.”

Speaking further, Gwadabe called for an executive order to deposit their holding into non exports domiciliary with silent sources requirement of an amount below # 50k for 3 months.

He also called for creation of investments bonds for Nigerians in the Diaspora without a tax charges.