The exchange rate gap between the official and parallel segments of the foreign exchange market narrowed by more than a half in one week amid a decline in the demand for dollars.
The exchange rate spread narrowed to N226.72 per dollar on Friday from N494 a week earlier.
The naira strengthened against the dollar on the black market to 1.020/$, compared to a low of 1.310/$ the previous week. It however depreciated on the official market to N793.28/$ on Thursday as against N786.02/$ the preceding day.
Ibukun Omoyeni, Sub-Saharan Africa economist at Lagos-based Vetiva, said in an October 31 note: “Following the removal of subsidies, the central bank allowed the exchange rate to float in the official market. While the subsequent depreciation in the official market led to a short-lived parity with the parallel market, the FX gap reemerged due to the absence of buffers/supply amid the backlog of FX demand from foreign portfolio investors, airlines, and importers.
“While the framework for a unified FX regime has been put in place by redrafting Bureau de Change operators into the Nigerian Foreign Exchange Market and removing FX restrictions on 43 items, the absence of FX supply amid a low net reserve stock has caused the naira to fall freely in both the official and parallel markets. This is especially due to forward obligations ($6 billion) that were due since February 2023.”
It was gathered that speculators were selling the dollars they had been hoarding, following news about government plans to increase liquidity in the market.
Wale Edun, the finance minister, said on October 23 that the country was expecting as much as $10 billion in new foreign currency inflows in the next few weeks to ease acute dollar shortages in the foreign exchange market. Also, the Central Bank of Nigeria last week started clearing FX backlog and delivered on over 75 percent to 80 percent of outstanding matured FX forwards in some specific banks.
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“We believe that Nigeria’s US dollar and naira-denominated markets are largely decoupled at the moment, and we also question whether such an inflow is good for Eurobonds,” Coronation Research analysts said in their October 30 note.
On the impact of the expected $10 billion FX inflow, they said: “The most important market is, of course, the foreign exchange market. Here it is noticeable that the parallel market did not appreciate very much after the announcement (which was at the Nigeria Economic Summit).
“The key question, and one that is very difficult to answer, is whether the arrival of a large sum of US dollars – and we cannot be sure exactly how much it will be – will satisfy all the various US dollar obligations and backlog in US dollar demand. If it does, then we could see a spectacular appreciation in the parallel rate. Watch this space.”
Here’s what JP Morgan expects
JP Morgan recently outlined the steps the Federal Government should consider in order to normalize the domestic financial market and re-open Nigeria’s local markets for investment.
It said: “Authorities may need to consider further measures such as requiring commercial banks to adhere to regulatory limits on FX net open positions, exploring the introduction of a CRR on FX deposits as well as issuance of dollar assets onshore and on the fiscal side, requiring all taxes to be paid in local currency.
“Furthermore, oil exporting companies should be encouraged to sell FX proceeds on the interbank market, rather than directly to the central bank. Authorities may also want to re-consider the willing buyer-willing-seller nature of the FX market, as it currently contributes to extreme volatility and impedes price discovery. Some of these measures may well be already incorporated in the governments forthcoming revision of guidelines relating to the operations of the foreign exchange market.”
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The $10 billion in FX inflows expected over the coming months is split between $7 billion from the securitization of future gas dividends to the government and $3 billion from the securitization of future oil-related dividends.
JP Morgan said:;“The ability of the government to raise such amounts via these channels may be challenging given the $3billion expected from Afrexim has been delayed for months, while Nigeria LNG Limited’s (NLNG) historical dividends to the government has fallen well short or $2billion annually.
“It also doesn’t help that the NNLG Managing Director recently confirmed that the company is operating at 50 percent capacity on its Train 1-6 fields and plans to expand its processing capacity with the Train 8 is no longer feasible.
“That said, the government appears to be in the final stages of agreeing a $3.5 billion package with the World Bank (part of which would be direct budget support, while the rest will be project-linked) with other reports suggesting funding from sovereign wealth funds in the middle east may be on the cards.’