The naira depreciated against the dollar at the Investors and Exporters (I&E) window on Monday, closing at N386.50 to a dollar, compared to the N386 to a dollar that was reported on Friday, July 3, representing a 50 kobo drop. This is as traders mulled over reports that the CBN had adjusted the exchange rate at the SMIS window. The opening indicative rate was N387 to a dollar on Monday. This represents a 14 kobo drop when compared to the N386.86 to a dollar opening rate that was recorded last week Friday.
At the black market where forex is traded unofficially, the naira remained stable as it closed at N461 to a dollar on Monday which was the same rate that it exchanged last week Friday. Speculators appear to be uncertain about what next to do, as they do not know what other moves the CBN has in the offing.
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 has set plans in motion to unify the multiple exchange rates in line with requirements from the World Bank. Nigeria is seeking a world bank loan of up to $3 billion.
Forex turnover at the Investor and Exporters (I&E) window recorded a decline on Monday, July 6, 2020, as it dropped by 90.3% day on day, a major decline from the figure that it achieved on Friday at 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 decreased from $105.05 million on Friday, July 3, 2020, to $10.15 million on Monday, July 6, 2020, representing a 90.3% decline on a day-to-day basis. This is a reversal from the impressive turnover that was recorded the past 2 days and a far cry from the $200 million mark that was in January and last week.
The very low liquidity puts a lot of pressure on the foreign exchange market.
Forex Liquidity Issues
The volatility and uncertainty of the forex market still persist due to accumulated demand and liquidity shortages across markets. The rise in demand and contrasting drop in supply has called for another round of devaluation, which the CBN has insisted it had plans to implement.
The CBN on Friday adjusted the naira at the retail forex auction from N360 to a dollar to N380 to a dollar in a move that most analysts see as part of the plans to unify the exchange rate of the Naira. A devaluation last occurred in March. The apex bank wants to unify the exchange rate to conserve the dwindling external reserves which have been hard hit by demand by ever-increasing importers and the foreign investors wishing they exit the country.
This current step taken by the CBN has moved the retail auction for importers and individuals, which is the official rate closer to the over-the counter-spot for investors and exporters. Nairametrics spoke to some traders who are still reviewing what the latest move by the CBN could mean on the future price of forex. Whilst some believe this is a major step towards reunification others believe the real test of the value of the exchange rate could be when the economy finally opens. For now, projection is all speculation, one trader informs Nairametrics.
The CBN still continues to warn against currency speculators who patronize the black market, thus widening the gap between it and the I&E window. The CBN maintains that the perceived demand cannot be substantiated following the drop in economic activities 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. The CBN claims most of the demand being cited is not represented by any official documentation and that it has informed foreign investors with genuine forex demand to be “patient” and that they will get their forex.
The pressure in the forex crisis is compounded by the continuous slide in the external reserve which dropped to $36.19 billion as of June 29, 2020. This represents a drop of about $400 million within a month when compared to the $36.59 billion that it was as of May 29, 2020.
According to a report from Reuters, the confusion in the foreign exchange market continued as currency traders refused to quote prices for the naira at the official market during retail auction amid confusion about the impact of the CBN’s exchange rate adjustment.