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Currencies

Why exchange rate disparity remains high despite CBN’s intervention

Despite the intervention measures by the CBN, why does the disparity between the official and black-market rates remain high?

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Naira, Why exchange rate disparity remains high despite CBN’s intervention

The Nigerian economy has been faced with serious foreign exchange crisis since the first quarter of the year, with severe pressure on the nation’s foreign exchange market and external reserve. The local currency is under the grip of tough external pressure, characterized by internal foreign exchange shortages and consistently high black-market rates. This has led to a high disparity between the official exchange rate and black-market rate.

The undesired situation is attributable to the crash in crude oil prices, triggered by the coronavirus pandemic that has impacted negatively on the global economy. The plunging oil prices have increased the pressure on the naira, as about 90% of Nigeria’s foreign exchange earnings is from crude oil exports.

READ: Nigerian’s should expect “a significant devaluation” to N550/$1 – Goldman Sachs

Bank of Africa analysts, Rukayat Yusuf and Andrew MacFarlane, in its Global Bank’s latest report on Nigeria’s forex unification and shortages, said that Nigeria’s current foreign exchange pressure is likely to gain momentum in 2021, as the economy and imports recovery will trigger a future adjustment of the nation’s currency to N430/$1 next year.

Recall that despite several initial denials by the Central Bank of Nigeria (CBN), in response to the devastating impact of the coronavirus pandemic and oil shocks; the apex bank on March 20, 2020, devalued the exchange rate from N307/$1 to N360/$1. This was followed with the suspension of sales of foreign currency to the Bureau De Change operators on March 27, 2020, in the face of depleting external reserves.

READ: CBN injects fresh $51.8m into FX Markets

In a move viewed as attempts by the CBN to unify the exchange rate, the apex bank further devalued the naira on August 6, 2020, from N360/$1 to N380/$1 on the official window and closed the gap with the parallel market – which is the unofficial market. The huge exchange rate gap has made round-tripping very lucrative and encouraged hoarding amongst forex dealers.

Goldman Sachs analysts had earlier predicted that the exchange rate will dip to N500 to $1 in the face of rising inflation and declining external reserves. The wide gap between the official and unofficial rates is seen by analysts as an indication of increasing pressure on the forex market and dollar shortages, which the CBN is trying to contain with several policies targeted at reducing the demand for the greenback, conserve the scarce foreign exchange, and help boost dollar supply in the market.

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READ: CBN announces resumption of sales of forex to BDC

Some of these policies include:

  • Resumption of sales of dollars to the Bureau De Change Operators and mandating them to sell at not more than N386 to a dollar.
  • Removal of third parties from buying forex routed through Form M.
  • Clampdown on exporters who refuse to repatriate their export proceeds to Nigeria.
  • Restriction on forex allocation to importers of maize by the Deposit Money Banks (DMBs).

READ: Nigeria’s inflation rate hits 13.71% as food prices soar

However, despite some of these measures by the CBN, the disparity between the official and black-market rates still remain as high as almost N70. So, the question is why the huge gap? Especially, with the resumption of dollar sales to the BDCs.

READ: COVID-19: How CBN policies helped prevent the collapse of the Nigerian economy – Oscar Onyema

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Some analysts and stakeholders have complained that the measures are hurting business operations and pushed more demands to the parallel market. They believe it has encouraged hoarding and speculations to continue thriving; thereby, making it difficult to reduce the black-market rate.

What they are saying

While expressing his view on why the exchange rate disparity is still high, despite the resumption of dollar sales to BDCs; the President of Association of Bureau De Change Operators of Nigeria (ABCON), Aminu Gwadebe, said the impact of the resumption of sales of foreign exchange to BDCs is expected to be gradual.

READ: Naira gains across the forex markets as dollar supply rises sharply by 201%

Gwadebe said, “Firstly, the impact is gradual. You know there was a time when the dollar reached N500/$1. N474, N480 to a dollar was when there were other interventions in the market. As soon as the news of the resumption of sales to Bureau De Change broke, we witnessed the dollar going for as low as N420, N430 to a dollar. However, after taking off, the rate is now N460, which is the parallel market rate.

“Don’t forget there is a huge backlog and every other buyer – authorized or unauthorized, queued in the parallel market. So, the pressure is on the parallel market from manufacturers and existing investors. In fact, the most unfortunate behavior is hoarding and speculation.’’

READ: Ethereum whales move over $50 million of Ether to Uniswap

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The ABCON President noted that people hoard and speculate when liquidity is low in the retail sector of the market. He pointed out that, although the liquidity is gradual, the rebound is expected to continue gradually.

Gwadebe said the role of the BDCs is to provide liquidity in the retail end of the market, which is what the CBN is empowering the BDCs to do and a key reason the rate has improved from the record high of about N480/$1.

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He noted that the resumption of sales of dollars to BDCs is discouraging frivolous demands, adding liquidity into the system, aiding return of confidence and stability in the market.

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He reiterated that the BDCs remain the only threat to hoarding and speculation, while expressing satisfaction that the reserve is growing and will increase the confidence of investors.

Chike Olisah is a graduate of accountancy with over 15 years working experience in the financial service sector. He has worked in research and marketing departments of three top commercial banks. Chike is a senior member of the Nairametrics Editorial Team. You may contact him via his email- [email protected]

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    Currencies

    Naira appreciates at NAFEX as Nigeria’s external reserve is set to get a boost

    Naira gained against the US Dollar at the NAFEX window on Friday to close at N409/$1.

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    Naira falls across forex markets as businesses resume after public holidays

    Friday, 9th April 2021: The exchange rate between Naira and the US Dollar closed at N409/1$ in the Importers and Exporters window, where forex is traded officially.

    Naira gained against the US Dollar at the NAFEX window on Friday to close at N409/$1. This represents a 0.16% gain when compared to N409.65/$1 recorded on Thursday, as the country’s external reserve is set to receive a boost with the planned issuance of $500 million Eurobonds.

    Meanwhile, the naira maintained stability at the parallel market on Friday, 9th April, 2021 to close at N485 to a dollar, the same rate as maintained since last week.

    Trading at the official NAFEX window

    Naira appreciated against the US Dollar at the Investors and Exporters window on Friday to close at N409 to a dollar. This represents a 65 kobo gain when compared to N409.65/$1 recorded on Thursday, 8th April 2021.

    • The opening indicative rate closed at N409.79 to a dollar on Friday. This represents a 71 kobo gain when compared to N410.50/$1 recorded on Thursday.
    • Also, an exchange rate of N420 to a dollar was the highest rate recorded during intra-day trading before it closed at N409/$1. It also sold for as low as N395/$1 during intra-day trading.
    • Forex turnover at the Investor and Exporters (I&E) window dropped by 41.1% on Friday, 9th April 2021.
    • A cursory look at the data tracked by Nairametrics from FMDQ showed that forex turnover declined from $93.69 million recorded on Thursday, April 8, 2021, to $55.21 million on Friday, April 9, 2021.

    Cryptocurrency watch

    The world’s most popular digital currency, bitcoin recorded a 3.05% increase in value on Saturday evening, 10th April 2021.

    • Bitcoin went up by 3.05% to trade at $59,907 on Saturday evening, compared to $58,135 recorded at the close of trade on Friday.
    • This is coming after it had risen to $61,222.22 on Saturday, its highest in nearly a month, propelled by talks of constrained new supplies against evidence of wider adoption.
    • Bitcoin (BTC) is up 116% from the year’s low of $27,734 on January 4. It crossed the $60,000 mark for the first time on March 13, hitting a record $61,781.83 on Bitstamp exchange, just after U.S. President Joe Biden signed his $1.9 trillion fiscal stimulus package into law.
    • The digital currency has been widely adopted by many, replacing gold as the global digital-reserve asset.

    Oil price gain

    Brent crude oil price declined on Sunday evening as it closed at $63.02 per barrel, indicating a 0.28% drop compared to $63.2 recorded at the close of trade on Friday.

    • This is as the fall in oil prices especially towards the end of last week can be attributed to demand concerns and Covid-19 lockdowns in some major economies, due to a spike in infections.
    • The Russian government has said that the coronavirus pandemic could continue to impact on global oil demand until 2024.
    • Crude oil prices had recorded a marginal increase during the week despite the decision of the OPEC+ to ease production cuts in the coming months. However, US Shale Giant has commended the OPEC+ group for bringing supply and demand back to balance.
    • Brent Crude closed at $63.02 (+0.11%), WTI Crude closed at $59.39 indicating 0.12% gain, Bonny Light, $61.55 (+0.46%), OPEC Basket (+0.89%) to close at $61.22 while Natural gas gained 0.67% to close at $2.543.

    External reserve

    Nigeria’s external reserve gained $29 million on Thursday, 8th April 2021 to close at $35.006 billion, being the highest external reserve position recorded in over a month.

    • This indicates a 0.08% increase when compared to $34.977 billion recorded on Wednesday, 7th April 2021.
    • It also represents an increase in the country’s external reserve position for the 13th consecutive day, having endured a significant downturn earlier in the year. Nigeria’s reserve has added a total of about $590 million in 13 days.
    • This recent increase in Nigeria’s external reserve could however be attributed to the increase in crude oil prices recorded earlier in March before the recent bearish trade in the crude market.
    • It could be attributed to the possible increase in diaspora remittance as the CBN offers incentives for every unit of a dollar received in Nigeria from diaspora remittance.
    • The external reserve is likely to get further boost as the Federal Government recently announced plans to issue $500 million Eurobonds for 2021.

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    Currencies

    Exchange rate strengthens at NAFEX as dollar supply spikes by 690%

    Naira gained against the US Dollar on Thursday to close at N409.65/$1 while dollar supply surges by 690.6%.

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    on

    Naira stabilizes at black market as CBN continues its intervention in forex market

    Thursday, 8th April 2021: The exchange rate between Naira and the US Dollar closed at N409.65/1$ in the Importers and Exporters window, where forex is traded officially.

    Naira gained against the US Dollar on Thursday to close at N409.65/$1. This represents a 0.33% appreciation compared to N411/$1 recorded on Wednesday.

    Meanwhile, naira remained stable in the parallel market on Thursday, 8th April 2021 to close at N485 to a dollar, the same rate as maintained since last week.

    READ: Naira falls at NAFEX window despite 394% increase in dollar supply

    Trading at the official NAFEX window

    Naira appreciated against the US Dollar at the Investors and Exporters window on Thursday to close at N409.65 to a dollar. This represents a N1.35k gain when compared to N4111/$1 recorded on Wednesday, 7th April 2021.

    • The opening indicative rate closed at N410.5 to a dollar on Thursday. This represents a N0.76 depreciation when compared to N409.74/$1 recorded on Wednesday.
    • Also, an exchange rate of N419 to a dollar was the highest rate recorded during intra-day trading before it closed at N409.65/$1. It also sold for as low as N394/$1 during intra-day trading.
    • Forex turnover at the Investor and Exporters (I&E) window increased by 690.6% on Thursday, 8th April 2021.
    • A cursory look at the data tracked by Nairametrics from FMDQ showed that forex turnover grew from $11.85 million recorded on Wednesday, April 7, 2021, to $93.69 million on Thursday, April 8, 2021.

    Cryptocurrency watch

    The world’s most popular digital currency, bitcoin recorded a 0.18% decline in value in the early hours of Friday, 9th April 2021.

    • Bitcoin was down by 0.18% to trade at $58,135 on Friday morning, bur lead compared to $36,199 recorded at the close of trade on Wednesday.
    • Meanwhile, according to a research report, bitcoin is expected to surge around 600$ to hit the $400,000 level in 2021. This has been well met as major financial institutions in the world such as Visa, Goldman Sachs, and Morgan Stanley have embraced the digitalization of money.
    • The digital currency has been widely adopted by many, replacing gold as the global digital-reserver asset.

    READ: Naira remains flat as external reserve fall to just 6 months of imports

    Oil price gain

    Brent crude oil price recorded a marginal increase on Thursday as it closed at $63.2 per barrel, indicating a 0.06% gain compared to $63.16 recorded at the close of trade on Wednesday.

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    • Crude oil prices are beginning to record tepid growth demands are expected to increase due to revived optimism in the market as the United Kingdom has given the first vaccine to about half of its population, while the US has vaccinated about 30% of its population.
    • Crude oil prices have recorded a marginal increase during the week despite the resolve of the OPEC+ to reduce production cuts in the coming months. However, US Shale Giant have commended the OPEC+ group in bringing supply and demand back to balance.
    • Brent Crude closed at $63.2 (+0.06%), WTI Crude closed at $59.75 indicating 0.25% gain, Bonny Light, $60.6 (-2.63%), OPEC Basket (-1.06%) to close at $60.68 while Natural gas dipped by 0.12% to close at $2.519.

    External reserve

    Nigeria’s external reserve gained $1.79 million on Thursday, 8th April 2021 to close at $34.977 billion, being the highest external reserve position recorded in over a month.

    • This indicates a 0.01% increase when compared to $34.975 billion recorded on Thursday 1st April 2021.
    • This also represents an increase in the country’s external reserve position for the 12th consecutive day, having endured a significant downturn in the early parts of the year. Nigeria’s reserve has added a total of $560.5 million in 12 days.
    • This recent increase in Nigeria’s external reserve could however be attributed to the increase in crude oil prices recorded earlier in March before the recent bearish trade in the crude market.
    • It could be attributed to the possible increase in diaspora remittance as the CBN offers incentives for every unit of dollar received in Nigeria from diaspora remittance.

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