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Why naira fell sharply across FX markets

The combination of demands from 43 items restored to access foreign exchange (FX) and demands for school fees, among others, drove the sharp fall in the value of naira in two days.

The pressure on foreign exchange (FX) market intensified on Tuesday and Wednesday as naira fell to lowest across market segments on strong demand after the Central Bank of Nigeria (CBN)’s move for a single forex market rate.

Last week Thursday, the apex bank restored the 43 items prohibited from access to FX, eight years after, a move seen to usher in a single exchange rate.

Naira depreciated sharply to N848.12 per dollar at the Investors’ and Exporters’ (I&E) forex window on Tuesday, the lowest ever since the establishment of the window in 2017.

Also at the parallel market, popularly called black market, naira depreciated to an average rate of N1,084 per dollar on Wednesday, the lowest ever. This represents 3.23 percent depreciation over N1,050 sold during the morning trading session on Tuesday.

Some street traders sold one dollar at the rate of N1,100, some N1,095 but abokifx, an online platform that collates exchange rates, quoted dollars at N1,080.

Read also Naira falls to average of N1,084/$ on increased demand

“It could be the demand from the 43 items restored but at the same time it is the period when dollar demand also tends to rise due to school fees demands and holiday demands. So a combination of things of which 41 items may just be one,” Yemi Kale, partner & chief economist, KPMG Nigeria, said.

Muda Yusuf, chief executive officer of the Centre for the Promotion of Private Enterprise, said generally demand pressure has been high and that the gap between the I&E window and parallel market is huge.

“So there is no way that N777/$ rate can be a realistic rate. What is happening is that the CBN is trying to move towards the willing buyer and willing seller rate gradually. The willing buyer and willing seller rate is far above the I&E window rate. Also, you cannot rule out the additional pressure coming from the 43 items, it is also a possibility,” he said.

The exchange rate gap between the official and parallel market segments of the foreign exchange market has widened by over 100 percent as naira depreciated across markets on Tuesday and Wednesday.

Yesterday, Wednesday, the spread between the official and unofficial FX markets closed at N236 per dollar compared to N1.83 on June 22, 2023, after FX reform.

During the FX auction on Tuesday, willing buyers and willing sellers offered the highest bid of N981/$1 and lower bid of N700/$1, data from the FMDQ indicated.

The daily foreign exchange market turnover increased by 211.62 percent to $134.28 million from $43.09 million recorded on Monday.

On Tuesday June 21, 2023 the naira/dollar exchange rate converged, closing at the rate of N756 at both markets after the unification of the FX windows in the same month by the Central Bank of Nigeria.

The closing of the exchange rate gap and the convergence followed the recent foreign exchange policy reforms carried out by the CBN.

Read also Weaker naira drives up foreign demand for local products

As part of its responsibility to ensure price stability, the CBN said it will boost liquidity in the Nigerian foreign exchange market by interventions from time to time.

“As market liquidity improves, these CBN interventions will gradually decrease”, the CBN said.

Nigeria’s Central Bank said it will continue to promote orderliness and professional conduct by all participants in the Nigerian foreign exchange market to ensure market forces determine exchange rates on a Willing Buyer – Willing Seller principle.

The CBN reiterates that the prevailing FX rates should be referenced from platforms such as the CBN website, FMDQ, and other recognised or appointed trading systems to promote price discovery, transparency, and credibility in the FX rates.

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