Naira drops to N927/$ despite CBN attempts to ease FX backlog,

    Despite the Central Bank of Nigeria’s (CBN) efforts to clear the backlog of foreign exchange in two weeks, pressure on Nigeria’s foreign exchange (FX) market persisted on Thursday as the naira dropped to N927 per dollar at the parallel section of the FX market.

    One dollar was quoted at N927 on Thursday during intraday trade, which was less than the N917 quoted at the beginning of the week on the parallel market.

    According to data from the FMDQ, the naira lost 3.57 percent of its value in the Investors and Exporters (I&E) forex window on Wednesday, when the dollar was quoted at N771.59 as opposed to N744.97 on Tuesday.

    The CBN declared on Monday that it will cooperate with the banks to pay off the FX backlog within the next two weeks.

    At a news conference in Lagos, acting governor Folashodun Adebisi Shonubi revealed this.

    Damilare Akinlotan, investment and equities analyst at Risevest, said: “I believe we will start to see changes when the backlog is cleared, we still have a significant amount of FX reserves to spare, and our dollar earnings increase by significant proportions – otherwise another backlog just builds up and we are back to the starting point.”

    He claimed that the reason for the current foreign exchange crisis is that we do not earn enough money to cover all of our foreign exchange needs. As a result, we borrow money or use our foreign exchange reserves whenever necessary.

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    This is a positive step, according to Ayodeji Ebo, managing director/CBO of Optimus by Afrinvest, but the plan for how it will be accomplished was not made apparent.

    If this is done, he claimed, it will increase economic confidence and close the gap between the official and underground markets.

    Naira Vs Dollar

    This is very crucial. The 41 goods on the exclusive list should be removed in order to support this change and bring demand back to the official market. For example, because of their trades, traders of Eurobonds would increase liquidity in the foreign exchange market, he claimed.

    The FX market in Nigeria, according to Akinlotan, who is also a financial analyst at Krypton Venture Studio, is primarily driven by speculations and market feelings rather than genuine demand and supply. This is most successful when the market is more dissatisfied with the exchange rate, though.

    When consumers believe that rates will rise tomorrow, the effect is felt much more quickly, and the market responds more quickly than when they believe rates will fall.

    “When NNPC received the $3 billion credit facility a few weeks ago, it took until the following day before dollar rates decreased, but the JPM report stating that Nigeria had significantly less foreign exchange reserves than that, or roughly $3 billion, promptly sent rates higher again into the N900/$1 range.

    In essence, he added, “Nigeria’s FX market reacts more quickly to bad news regarding rates than good news, and that’s pretty understandable because most BDCs and even banks tend to make a lot more when rates go higher than when rates go lower.

    He commented on the backlog, saying, “It has been there for quite some months and despite many dollar injections (announced and undisclosed) by CBN, we still have a significant backlog of FX demands therefore I don’t really think they are going away anytime soon.

    “I still don’t believe we have enough dollars to satisfy market demand, so I don’t see the rate declining anytime soon.”

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