Pressure on Naira Intensifies, Hits N1,740/$1 in Parallel Market as Dealers Eye CBN Intervention

The Naira’s depreciation deepened last weekend, sliding to N1,740 per dollar in the parallel market as foreign exchange shortages and high demand continue to strain the local currency. In the Nigerian Autonomous Foreign Exchange Market (NAFEM), however, the Naira showed slight appreciation, raising hopes that the Central Bank of Nigeria (CBN) might step in to stabilize the exchange rate.

Data from FMDQ indicated that the NAFEM indicative rate slightly improved, closing at N1,600 per dollar, up from N1,601.2. Despite this minor gain, analysts warn that continued pressure could drive the exchange rate to N1,750 by the end of October and possibly to N1,800 by year-end, erasing the gains recorded earlier this year.

In the parallel market, the Naira has depreciated by 70.5% year-on-year, closing September 2024 at N1,705/$1 from an average of N1,000/$1 in September 2023. Meanwhile, year-to-date, the local currency has dropped 16.7% from N1,490/$1 in January 2024.

Divergent Views on Exchange Rate Pressures

The depreciation has exposed policy divisions between fiscal and monetary authorities, with the CBN and the Ministry of Finance offering contrasting solutions. CBN Governor Yemi Cardoso highlighted demand pressures linked to monthly FAAC (Federation Account Allocation Committee) disbursements, which, he noted, impact liquidity and exchange rates. The CBN plans to increase monitoring of FAAC disbursements to mitigate these pressures.

In contrast, Finance Minister Wale Edun, speaking at the World Bank Group meetings in Washington, DC, emphasized the role of forex supply, urging increased oil production to boost dollar inflows and ease currency pressures.

Market Adjustments and New Forex Trading Model

Dealers report that severe dollar shortages have pushed the exchange rate near what they term the CBN’s “fear index.” They anticipate the CBN will implement defensive measures, including enhanced forex interventions, to counteract further depreciation. Since August, the CBN has scaled back its retail Dutch FX auctions, a decision attributed to limited forex resources.

The CBN has also announced a new Automated FX Trading Model, slated for a test run in November and full launch in December, which aims to increase transparency and curtail market speculation. This system, the CBN says, will “facilitate a market-driven exchange rate accessible to the public.”

Naira Risks Worst Global Performance

Analysts warn that if the current trend persists, the Naira could become the world’s worst-performing currency by year-end. While the government celebrated the Naira’s sharp appreciation in March 2024, the World Bank recently listed it among the poorest performers in sub-Saharan Africa.

Dealers Anticipate Continued Depreciation

Dealers in the parallel market attribute the escalating dollar demand to supply constraints in the official market. Importers unable to secure dollars through formal channels increasingly turn to the black market, exacerbating the currency shortage. According to Mr. Liasu Moshood, a black-market trader, limited availability has led many traders to leave the market altogether due to insufficient supply.

Another trader, Mr. Idris Daud, projected the exchange rate to reach N1,750 per dollar by October’s end and N1,800 by December, citing heightened demand for holiday imports and restocking. He noted, “The demand pressure is high as organizations prepare for the festive season, and limited dollar inflows compound the issue.”

As December approaches, both traders and analysts agree that only substantial forex injections and policy adjustments will prevent further depreciation.