Currencies
Naira gains against the dollar at I&E window, forex liquidity up by 242%
Forex shortages have persisted since the crash in oil prices coincided with the global lockdown.
Forex turnover at the Investor and Exporters (I&E) window recorded a huge increase on Monday, June 29, 2020, as it rose by 242%, a significant increase from what was recorded on Friday, June 26, 2020, in the foreign exchange market. This is according to data from the FMDQOTC, an exchange where forex is traded by foreign investors and exporters.
According to the data tracked by Nairametrics, forex turnover increased from $35.92 million on Friday, June 26, 2020, to $122.89 million on Monday, June 29, 2020, representing a significant increase of 242% a day on day. While the percentage increase in turnover appears huge, it still falls short of the $200 million recorded in January 2020.
It is unclear where the increase in forex supply came from as this is one of the highest daily sales we have recorded
Although there seems to be an improvement in liquidity in the foreign exchange market, the volatility and uncertainty of the market remain due to liquidity shortages across markets. Liquidity remains quite tight in the foreign exchange market, with the average turnover in the I&E market significantly down to about $45.5 million in the month of May compared to $297.5 million that was recorded in January.
Several reports tracked by Nairametrics indicate that the accumulated demand for forex in the market could be between $1.5 and $5 billion as supply shortages persist. Forex shortages have persisted since the crash in oil prices coincided with the global lockdown due to COVID-19. The rise in demand and contrasting drop in supply has called for another round of devaluation, which the CBN has insisted it has plans to implement. A devaluation last occurred in March. The activities of the speculators seem to have continued unabated.
READ MORE: Naira falls big at the black market as demand pressure persists
Speculators have thus patronized the parallel market, otherwise known as the black market, thereby widening the gap between it and the I&E window. The CBN maintains that the perceived demand cannot be substantiated as the lockdown induced by the COVID-19 pandemic suggest demand should be low due to travel restrictions and drop-in economic activities.
The further decline in liquidity could further fuel speculations in the black market where the exchange rate has traded at a premium of N60 over the last few weeks.
Exchange rate
In related news, the exchange rate on the I&E window continued with its positive performance as it appreciated on Monday, closing at N386 to a dollar, compared to the N386.33 to a dollar that was reported on Friday, June 26, representing a 33 kobo gain. The opening indicative rate was N386.86 to a dollar for Monday. This represents a loss of 50 kobo when compared to the N386.36 opening rate recorded on Friday.
At the black market where forex is traded unofficially, the naira remained stable as it exchanged for N460 to a dollar on Monday. This was the same exchange rate that was recorded on Friday last week.
Nigeria continues to maintain multiple exchange rates comprising the CBN official rate, the BDC rates, and the NAFEX (I&E window). Nairametrics reported last week that the government is mulling unifying the multiple exchange rates in a bid to increase the amount available for state governments to share.
READ MORE: Naira recovers sharply at black market but falls at I&E forex window
The stability of the exchange rate in the foreign exchange market can be attributed to a relative drop in demand for the dollar and improvement in forex liquidity. There still appears to be some uncertainty in the foreign exchange market as it is still not clear when the Central Bank of Nigeria (CBN) will resume sales of dollars to Bureau De Change Operators (BDCs).
The planned opening of the airports for flight operations by the federal government will act as a boost to the CBN’s intervention in the BDC segment of the market.
The World Bank had also applauded the CBN’s plan to unify its multiple exchange rate as that will help attract foreign investment to boost sustainable economic recovery and also support the various reforms being introduced by the government.
Currencies
Naira falls against US dollar as CBN extends Naira4dollar scheme indefinitely
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Currencies
How rise in oil prices will impact exchange rate
Oil prices are currently inching closer to $70 per barrel as the positive outlook of a return to global economic recovery swells investor sentiments.
Nigeria, Africa’s top oil producer and home to the second-largest reserves on the continent, is expected to benefit from the rise in oil prices in many ways.
Oil prices are currently inching closer to $70 per barrel as the positive outlook of a return to global economic recovery swells investor sentiments.
Historically, there has been a strong positive correlation between crude oil prices and the performance of the Nigerian economy. For example, when oil prices plummeted due to the COVID-19 outbreak and the implementation of lockdown protocols in 2020, the Nigerian government scaled down the budget to align better with the drop in crude oil price.
Now that there is a surge in oil price, we should expect that there would be an increase in government revenue translating to a stirring-up of aggregate demand.
READ: Nigeria records highest trade deficit since 1981
Why oil price is rising
The OPEC+ output restrains, despite the strong recovery of oil consumption, continues to give formidable fitting to bullish sentiments about soaring oil prices.
- Oil prices are rising as optimism about a strong rebound in fuel demand in developed countries overshadows concerns of full lockdown to curb covid-19 in India.
- Oil (BRENT) has seen a 34.3% increase Year to Date with the oil price at $69.34 showing an increase of +1.15% as of the time of writing this article.
What it means for the exchange rate
Perhaps the greatest benefit of the recent oil price rise is exchange rate stability. Since the crash in oil prices began in late 2019, Nigeria’s official currency has faced a barrage of sell pressure as local and foreign investors increase demand for the dollar.
This forced the central bank to curtain demand, implementing various forms of capital controls across the economy. With oil prices on the rise, Nigerians can begin to expect the following:
- An increase in government revenue, which also means higher dollar earnings and thus increased FX reserves. Nigeria’s FX reserve reportedly stands at $34.7 billion as of Tuesday, May 4th, 2021. Soaring oil prices strengthen the exchange rate and promote economic growth. This effect trickles down to higher reserves held by the CBN meant for stabilization of the currency.
- Higher oil prices could also mean a more stable economy thus propelling economic growth. This, in turn, attracts foreign investor dollars or at least retains what we already have and reduces the pressure on demand.
- Nigerians have intensified diversifying their currency holdings, keeping less of naira and holding more dollars as they hedge against depreciation. This has kept the pressure on the exchange rate over the last one and a half years. This trend could reverse if oil prices continue their steady rise.
READ: Dangote: Cement price from our factories is between N2,450 and N2,510 per bag, VAT inclusive
The implication? The parallel market exchange rate might appreciate closer to the NAFEX rate if this trend continues.
Hence, it is safe to presume that as the world resume business and travel activities, the demand for Black Gold will continue to increase, and with supply held steady by OPEC+ we can speculate that this is enough catalyst to relieve the pressure of FX demand and increase our foreign reserves thereby propelling growth.
However, the inclusivity of this growth may still be in question.
