UPDATED: This article was originally published on June 19
A move by the Nigerian government to float the Nigerian Naira has backfired. The government-implemented currency float is meant to help close the gap between official and black-market exchange rates.
Instead, the Nigerian Naira has experienced a record plunge, severely impacting Nigeria’s economy. In this article, CMTrading examines the cause behind the devastating drop and provides advice for all online traders.
Latest on Naira – July crash continues
On Monday, July 17, 2023, the Naira experienced a slight rebound against the US dollar, recovering from its recent low point on the previous Friday.
Data obtained from FMDQ securities revealed that the Naira’s closing exchange rate against the US dollar stood at N795.28 on Monday, representing a positive change of 1.07% or N8.62 compared to the previous rate of N803.90 on July 14.
Although the total forex transaction volume recorded on Monday was $34.55 million, reflecting a decline of 26.33% compared to the $46.9 million recorded on Friday.
However, in the parallel market, the Naira’s exchange rate remained above N800 per dollar.
According to Daily Trust, the dollar was traded between N825 and N830 in Lagos, while in Abuja, it ranged from N810 to N812. In Kano, it was exchanged at N820. At the peer-to-peer forex window, where cryptocurrency stablecoins are used for trading, rates hovered around N831/$1 on Monday.
Regarding the depreciation of the Naira, Aminu Gwadebe, the President of the Association of Bureau De Change Operators of Nigeria (ABCON), urged the Central Bank of Nigeria to include BDCs in the Investors and Exporters window to curb the continuous decline of the Naira.
On July 11, the Naira experienced a depreciation, reaching its lowest value in nine months at N800 per dollar. This drop was attributed to a surge in demand for the US dollar in the parallel market, commonly known as the black market. The value of the Naira decreased by 0.62% compared to the intraday trading value of N795 per dollar on the same day.
According to a trader interviewed by BusinessDay, the increased demand for the dollar was driven by various factors, including people purchasing it for summer holidays and importation purposes.
A similar situation occurred in October 2022 when the Naira fell to N800 per dollar due to heightened demand from individuals who had stockpiled Naira during the currency redesign program conducted by the Central Bank of Nigeria (CBN).
Data from the Financial Markets Dealers’ Quotations (FMDQ) revealed that at the Investors and Exporters (I&E) forex window, the Naira experienced a 5.62 percent weakening, with the dollar quoted at N788.42 on July 11, compared to N744.07 on July 10.
On June 14, 2023, the CBN made changes to the official foreign exchange (FX) market by transferring certain segments to the I&E Window, which reintroduced the concept of “willing buyer and willing seller.” As a result, the official exchange rate increased from N463.38/$ to the current rate of N800.
Prior to mid-June, the exchange rate policy aimed to maintain a relatively stable official exchange rate that was lower than the market-clearing rate.
However, the World Bank, in a recent report, stated that the Nigerian FX market lacked a transparent and predictable price discovery mechanism due to the utilization of multiple FX windows for different purposes.
This hindered FX supply at the NAFEX window (Nigerian Autonomous Foreign Exchange Fixing) and compelled economic agents to resort to the parallel market, leading to arbitrage and rent-seeking opportunities.
According to the World Bank report, as of June 13, 2023, the premium between the parallel market and NAFEX stood at 63%, indicating a significant overvaluation of the NAFEX rate. In an effort to reduce FX demand, preserve external reserves, and maintain a stable NAFEX rate, the CBN implemented administrative controls.
These measures included limiting FX access for the importation of 43 products since 2015 and reducing the size of FX supply interventions since 2020.
The World Bank report acknowledged that the previous exchange rate management approach hindered investment and growth. Therefore, the recent changes in FX policy and management were seen as a positive development that could unlock economic growth.
Airfares for international destinations have skyrocketed following the implementation of a new exchange rate formula by the Central Bank of Nigeria (CBN). International airlines have adjusted their rates to reflect the devaluation of the naira, with the exchange rate on June 22 standing at N702 per dollar.
The Nigerian Naira’s Record Drop
The decision by the Central Bank of Nigeria (CBN) to float the Nigerian Naira has delivered an unwanted outcome for investors and traders alike; a historical fall in value against the US Dollar.
Intended to curb US Dollar scarcity and curtail parallel forex exchange markets, the move sent the Naira down by 36% on the official market on June 14.
The new policy removed trading restrictions on the official market, forcing the Nigerian Naira to go from N477 per US dollar on June 13 to N750 on June 14.
Nigerian Naira On Life Support
By June 16, it was N663, representing a rise of 5.58% from the close of N702.19/$1 recorded on June 15. As of June 19, it was N656.96 to the USD.
The Central Bank of Nigeria has issued a directive to deposit money banks, instructing them to remove the rate cap on the Naira at the Investors and Exporters window.
This move aims to enable the Naira to freely float against major world currencies, as part of President Bola Tinubu’s commitment to unify the multiple exchange rates.
Two prominent Nigerian billionaires, Aliko Dangote, and Abdulsamad Rabiu, both listed on Bloomberg’s 500 billionaire index, experienced a combined loss of $5.85 billion during the week.
This development coincides with the recent actions taken by Nigeria’s new president, who suspended and subsequently arrested the governor of the Central Bank of Nigeria, Godwin Emefiele.
The suspension of Emefiele by President Bola Ahmed Tinubu took effect immediately, on the same day as his arrest.
The decision to suspend Emefiele was made considering the ongoing investigation into his office and the planned reforms in the financial sector of the economy, as stated in a release by Willie Bassey, the Director of Information for the Secretary to the Government of the Federation, George Akume.
The CBN recently devalued the naira and instructed commercial banks to freely trade foreign exchange at market-determined rates. As a result, airfares in Nigeria for flights to Europe, North America, the Middle East, and other foreign countries have significantly increased, aligning with the new exchange rate.
The CBN’s objective in introducing new foreign exchange guidelines is to unify the country’s forex rate and eliminate multiple exchange rate windows. The apex bank consolidated all forex windows into the Investors and Exporter (I&E) window.
Within 24 hours of this decision, the naira was trading at N664.04 per dollar, and two days later, it closed at N702 per dollar.
The International Air Transport Association (IATA) has adjusted its ticket pricing exchange rate to N702 per dollar, following the new forex policy. Prior to this, the exchange rate had risen from N445 per dollar to around N660 per dollar two weeks ago.
Travel operators have expressed concerns about the significant surge in ticket prices, which may impact the summer travel plans of many Nigerians.
Foreign airlines operating in Nigeria have also adjusted their Rate of Exchange (RoE) from N610 to N634 per dollar. Consequently, Nigerians traveling to countries such as the United States and the United Kingdom will experience higher ticket prices.
In recent months, there has been an increase in the number of Nigerians seeking to leave the country for purposes such as studying, working, or receiving medical treatment.
The devaluation of the naira and the subsequent increase in airfares highlight the impact of the CBN’s new forex policy on the travel industry. Nigerians planning international trips will need to consider the revised exchange rates and factor in the potential cost implications of the devaluation when making their travel arrangements.
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