The Nigerian currency, the Naira depreciated to N1,503.38 against the dollar on Wednesday as investors’ demand resurfaced at the official market.
According to FMDQ Exchange, the Naira at the Nigerian Autonomous Foreign Exchange Market dropped by 0.3 percent from N N1,499.07 against the dollar it closed the previous day.
The local currency on Monday reached its highest peak of N1,534.39 against the dollar despite numerous policies of the Central Bank of Nigeria (CBN) on foreign exchange.
The Great British Pound (GBP) depreciated marginally by 0.53 percent to close at N1,895/ £1 as against N1,885/£1 the previous day while Naira also dropped against the Euro by 1.56per cent to close at N1600/Euro against N1,595 / Euro reported the previous day.
The CBN Governor, Olayemi Cardoso recently admitted that the Nigerian foreign exchange market is currently facing increased demand pressures, causing a continuous decline in the value of the naira.
Factors contributing to this situation, according to him, are speculative foreign exchange demand, inadequate supply, increased capital outflows, and excess liquidity.
“The shift to a market-driven exchange rate was intended to create a stable macroeconomic environment and discourage currency hoarding. However, short-term volatilities are attributed to arbitrage and speculation.
“To address exchange rate volatility, a comprehensive strategy has been initiated to enhance liquidity in the FX markets. This includes unifying foreign exchange market segments, clearing outstanding foreign exchange obligations, introducing new operational mechanisms for BDCs and IMTOs, enforcing the Net Open Position limit, Open Market Operations, and adjusting the remunerable Standing Deposit Facility cap among others,” he said.
He noted that the aim of ensuring a more market-oriented mechanism for exchange rate determination, will boost foreign exchange inflows, stabilize the exchange rate, and minimize its pass-through to domestic inflation.
Cardoso added that, “Indeed, they have already started yielding early results with significant interest from Foreign Portfolio Investors (FPIs) that have already begun to supply the much-needed foreign exchange to the economy.
“For example, upwards of $1 billion in the last few days came in to subscribe to the Nigeria Treasury Bill auction of N1 trillion which saw an oversubscription earlier this week.
“Our measures aimed at improving USD supply into the Nigerian economy have significant potential in taming the volatility of exchange rates. However, for these measures to be sustainable, we must as a country moderate our demand for FX.
“We understand that the genuine issue impacting the exchange rate is the simultaneous decrease in the supply of, and increase in the demand for, US Dollars. It is also clear that the task of stabilizing the exchange rate, while an official mandate of the CBN, would necessitate efforts beyond the Bank itself. It will also include actions by corporations and individuals to reduce our frequent demand for the dollar for business and personal needs,” he explained.
According to analysts at Coronation Research, “The impact of the CBN’s directive to banks to sell down part of their net long US dollar positions seemed to have been short-lived, even if turnover in the foreign exchange markets did improve significantly for a while.
“The gap between the parallel and the NAFEM market has reappeared, however. This further reinforces the need to improve the supply of US dollars into the market and we wait to see whether the reforms attract foreign portfolio investors and encourage other flows.”
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