The fiscal crisis being faced by Nigeria as a result of the coronavirus pandemic appears to be easing off a bit, following the gradual rebound of crude oil prices globally. The improved foreign exchange inflow has helped to ease off devaluation concerns.
The forward market is not isolated from the bullish trend, as the 12-month naira forwards increased to N454.50 per dollar on Wednesday, from a high of N522.56 on April 20. Also, the currency traded at N388 to the dollar in the spot market.
The local currency has also appreciated from N460 to a dollar to N445 to a dollar in the parallel market in less than 2 weeks, not long after the Central Bank of Nigeria started selling dollars to small and medium enterprises and foreign students.
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The planned resumption of dollar sales to Bureau De Change (BDCs) is expected to further help ease the pressure in the market.
Meanwhile, the Brent traded over $40 per barrel, and the Nigerian Bonny light crude also traded almost $38 per barrel, both selling at the highest price in almost 3 months.
The oil prices are very important for Nigeria, as about 90% of its foreign exchange earnings is from crude oil sales.
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The foreign exchange market had been under intense pressure due to the low oil prices and the economic crisis caused by the coronavirus outbreak globally.
Nigeria’s external reserve had been badly hit, as it lost over $11 billion within a space of 10 months, crashing from its peak of $45.17 in June 11, 2019 to $33.42 in April 29, 2020.
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The oil price increase has caused a rebound in the external reserve to over $36 billion as of June 1, and reduced the pressure on the naira with improved liquidity of the foreign exchange market.
Meanwhile, according to Bloomberg, a forecast from Fitch Ratings suggests that the naira is not yet out of the woods as a large current account deficit, capital outflows, and resistance to overhauling the exchange rate framework may cause a drop in external reserves to about $23 billion by the end of 2020.
This will adversely affect the apex bank’s capacity to defend the naira.