The Nigerian naira experienced a significant decline on Thursday, reaching N1,400 against the US dollar on the black market. This plunge follows renewed demand pressure in the foreign exchange (FX) market, signaling a setback after the currency’s recent rally to N1,120 against the dollar.
The current depreciation of the naira represents a 19.64% loss in value over the past two weeks, compared to its rate of N1,125 per dollar recorded on April 12, 2023. Data from the Nigerian Autonomous Foreign Exchange Market (NAFEM) revealed that the naira depreciated to N1,308.52 per dollar on Wednesday, marking a 12.69% decline from its value two weeks ago.
Analysts attribute the recent downturn to a lack of hedge options for foreign investors, spooked by global geopolitical tensions such as the Israel-Hamas conflict and a strengthening US dollar. BusinessDay, citing sources, reported that the absence of exchange rate hedging products has left foreign portfolio investors (FPIs) vulnerable to market volatility.
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“There’s a lack of hedge – no NDFs and no ETDs – so FPIs are exposed to the Israel-Hamas war and with a statement of no intention to intervene by the CBN, they are selling their fixed income securities to take out their capital,” a source familiar with the matter told BusinessDay.
According to the same source, the market urgently requires exchange rate hedging products to manage volatility effectively.
In response to the market pressure, the Central Bank of Nigeria (CBN) has continued its foreign exchange supplies to Bureau De Change (BDC) operators. On Monday, the CBN approved the allocation of $15.83 million to 1,583 BDC operators to stabilize the FX market and ensure foreign currency accessibility to eligible end users.
In a letter addressed to BDCs, the CBN announced the allocation of $10,000 to each operator at a rate of N1,021 per US dollar. BDCs are directed to initiate payments to specified CBN Naira Deposit Account Numbers starting from April 22, 2024. Upon submission of payment confirmation and necessary documentation, the CBN will disburse foreign exchange at respective CBN branches.
Furthermore, BDCs are instructed to sell the allocated foreign currency to eligible end users at a spread not exceeding 1.5% above the purchase price, aiming to promote transparency and fair pricing in the FX market.
While the drop in naira is believed to be influenced by global uncertainties, analysts note that is a sign that the Nigerian FX market is still significantly short of adequate liquidity.
Acknowledging the potential influence of foreign investors on the Nigerian FX market, the CBN governor, Yemi Cardoso, said: “The response from the foreign portfolio investors has been very positive and it shows in the numbers and we expect from what the reactions that we got during the course of the past few days, that positive sentiment will continue to improve.”
Cardoso also admitted that the market is still volatile, and will require the CBN to continue rolling out measures to achieve price stability.
“Again, to be honest, I think we should expect that there will be increases here and there, ups and downs and even from what you’ve reported yesterday [last week], from what I gather, the naira has begun strengthening overnight,” he said.
“So I think the most important thing to say here is that we are doing everything possible to ensure that we have a stable exchange rate and an exchange rate that finds its adequate price discovery level. That is a process that will continue.”