CBN’s Measures To Defend Naira Gulp $330m In Ten Days.
Nigeria’s fast eroding foreign exchange (forex) reserves declined by $330million in less than ten days as the Central Bank of Nigeria (CBN) intensifies measures to save the steep falling naira.
The reserves which stood at $38.816billion as of Monday, Sept. 12, 2022, declined $330million or 0.85 per cent to $38.485billion on Thursday, Sept 22, 2022.
On a week-on-week basis, the foreign reserve shed 0.6 per cent to settle at $38.5billion as of September 21, 2022 down from $38.7billion in the prior week.
Almost on daily basis from September 12th to 22nd, Nigeria’s stock of foreign reserves dropped an average of $25million or 2 percentage points.
However, between September 15th and 16th, it shed $40.6million or 0.10 per cent to settle at $38.648billion on September 16, down from $38.689billon on September 15th.
This explains why at the I&E window, total turnover (as of 22 September) increased by 1.9 per cent week to date to $421.81 million, with trades consummated within the N425 to N453.03 per dollar.
On the back of the foreign exchange liquidity crisis and the crashing value of the Naira, Nigeria’s apex bank has adopted a more aggressive defence of the local currency, necessitating regular intervention in its official Importers and Exporters (I&E) window of the foreign exchange market.
In recent times, the CBN has become almost the only supplier of foreign exchange at the official window of Nigeria’s forex market, necessitating an accelerated drawdown of an average of 2 per cent of total reserve amounting to about $25million daily.
Supplying foreign exchange in the market and fixing the exchange rate of the naira to dollars in the official I&E window is intended to support the value of the country’s local currency.
According to the Managing Director and Chief Executive Officer, Valmond Securities Limited, Tajudeen Olayinka, in the face of zero earnings from crude oil, the CBN has no other source of dollar supply but to fall back on foreign reserves.
“CBN is the major supplier in the I&E window because other players are not forthcoming. Normally we should have inflows from oil proceeds, export proceeds, diaspora remittances, and foreign portfolio investors.
“Oil proceeds are zero, and portfolio investors fear that might be locked in due to forex shortages, and therefore have stayed away. And diaspora remittances are not enough.
“If you see any volume of dollars supplied in the I&E window, you can be sure that more than 90 per cent of it comes from CBN. So, the apex bank has to resort to drawing down from the foreign reserve to supply dollars in the market. This explains the accelerated draw down on the foreign reserve,” said Tajudeen.
He expects the trend to persist owing to the teleguidance of the market, a factor which he said, has kept other players away.
“The market should be a free market where forces of demand and supply determine exchange rate so that other players will be willing to play in the market. Because this is not happening, a lot of investors are not playing in the market,” said the financial analyst and dealing member of the Nigerian Exchange.
Nigeria has been struggling with the shortage of forex for a while as the main dollar-generating commodity (oil) suffers decreasing production output.
The fallback in production has led to a downward trend in the country’s external reserves, depreciating by US$1.37 billion to US$39.16bn in the first half of the year from US$40.52bn as of 2021.
The forex shortage has severely weighed on the naira this year, depreciating to a record low of N715 to a dollar at the parallel market in August and mildly at the official window.
Analysts expect the upcoming election to further worsen the currency depreciation till the end of the year as politicians aggressively increase spending and people continue to hoard dollars considering its tremendous appreciation so far.
For investors, CBN’s determined naira value does not reflect the actual value, which is why inflows are not forthcoming into the official window of the forex market.
Commenting on the situation, analysts at Cordros Capital Limited said “Although the CBN has enough liquidity to support the forex market over the short term, we highlight that foreign inflows are paramount for sustained forex liquidity over the medium term.
“Moreover, considering the tepid accretion to the reserves given the (1) low crude oil production level and (2) elevated PMS under-recovery costs, foreign portfolio inflows (FPIs) that historically supported supply levels in the I&E window will be needed to sustain forex liquidity levels in the medium to long term.
“Hence, we think (1) further adjustments in the Naira to Dollar peg closer to its fair value and (2) flexibility in the exchange rate would significantly attract foreign inflows back to the market,” the analysts concluded in the emailed report over the weekend.
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