On January 28, 2021, the exchange rate between the naira and the dollar depreciated closing at N394.33/$1 at the NAFEX (I&E Window) where forex is traded officially.
Also, the exchange rate at the black market where forex is traded unofficially remained stable at N478/$1. The exchange rate at the parallel market closed at N478/$1 on the previous trading day of January 27, 2021.
Why Naira is depreciating
- The weakening of the local currency could be attributed to demand pressure and forex shortage as dollar supply declined further by 27%.
- Manufacturers in Nigeria in a report, have listed difficulty in having access to foreign exchange to pay for their imports as the biggest challenge they face.
- The Central Bank of Nigeria is expected to devalue the naira by as much as 10% this year in the face of lingering dollar shortage in the country, according to a survey by Bloomberg.
The exchange rate disparity between the parallel market and the official market is about N83.67, representing a 21.2% devaluation differential.
To streamline forex supply and ensure there is enough to meet rising demand, the CBN moved to ensure strict monetary control of the forex market threatening to expel exporters who refuse to remit foreign exchange proceeds in the NAFEX market. It also warned against paying diaspora remittances in naira.
The CBN may have also confirmed the forex pressures businesses are facing in its monetary policy communique of January 26, 2020, when it cited it as a reason for the weak purchasing managers index.
“This weak performance was attributed to the resurgence of the pandemic, foreign exchange pressures, increased costs of production, a general increase in prices and decline in economic activities.”
Trading at the official NAFEX window
The Naira depreciated marginally against the dollar at the Investors and Exporters (I&E) window on Wednesday, closing at N394.33/$1. This represents an 8 kobo drop when compared to the N394.25/$1 that it closed on the previous trading day.
- The opening indicative rate was N394 to a dollar on Thursday, representing a 6 kobo gain when compared with the N394.06 to a dollar that was recorded on Wednesday, January 27, 2021.
- The N395 to a dollar was the highest rate during intra-day trading before it closed at N394.33 to a dollar. It also sold for as low as N388/$1 during intra-day trading.
- Forex turnover at the Investor and Exporters (I&E) window dropped by 27% on Thursday, January 28, 2021.
- According to the data tracked by Nairametrics from FMDQ, forex turnover declined further from $51.51 million on Wednesday, January 27, 2021, to $37.58 million on Thursday, January 28, 2021.
Oil price steady rise
Brent crude oil price hit about $55.60 on Friday morning as US crude stockpiles decrease by about 5.2 million barrels last week. A higher crude oil draw (a decrease in crude oil inventory) is attributed to higher refining activities in the world’s largest economy.
- Oil prices have been dragging since last week after the IEA released a report that slashed its outlook for oil in 2021.
- According to the IEA, “Global oil demand is expected to recover by 5.5 mb/d to 96.6 mb/d in 2021, following an unprecedented collapse of 8.8 mb/d in 2020. For now, a resurgence in Covid-19 cases is slowing the rebound, but a widespread vaccination effort and an acceleration in economic activity is expected to spur stronger growth in the second half of the year.
- “After falling by a record 6.6 mb/d in 2020, world oil supply is set to rise by over 1 mb/d this year, with OPEC+ adding more than those outside the bloc. There may be scope for higher growth given our expectations for further improvement in demand in 2H21. After holding flat at 92.8 mb/d in December, global supply is rising this month with OPEC+ due to ramp up during January.
- OPEC said that it withheld some 1.3 billion barrels of oil supply last year to keep prices from falling further.
- Nigeria needs oil prices to stay above $50 to balance its budget and improve on its 2021 revenue projection of N6.6 trillion for the year.
- Nigeria’s 2021 budget includes a target crude oil benchmark price of $40/barrel and crude oil production of 1.86 million barrels per day.
- Nigeria has a production capacity of 2.5 million barrels per day but is subject to OPEC’s crude oil production cuts, which are expected to help sustain higher oil prices.
- The higher oil prices and steady production output have positively impacted Nigeria’s external reserves, rising sharply to $36.431 million according to central bank data dated January 14, 2020.
- This is a sign that higher oil prices and steady output levels may be contributing significantly to Nigeria’s foreign exchange position.
Higher oil prices drive up Nigeria’s external reserves
- The external reserve has dropped for the first time in about 5 weeks to $36.431 billion as of January 26, 2021. However, this is a huge improvement on the $35.373 billion that it was as of December 31, 2020.c
- Nairametrics had earlier reported that the government may have taken receipt of the $1-1.5 billion World Bank loan. However, excerpts of the CBN Monetary Policy communique of January 26th suggest the inflows may have been driven by higher oil revenues.
- According to the CBN, “On the external reserves position, the Committee noted the increase in the level of external reserves, which stood at US$36.23 billion as at 21st January 2021 compared with US$34.94 billion at the end of November 2020. This reflected improvements in crude oil prices, partial global economic recovery amid optimism over the discovery and distributions of COVID-19 vaccines by most developed economies.”
- The external reserves have increased by $1.135 billion since December 31, 2020, when it closed the year at $35.3 billion.
- Nigeria also needs the external reserves to hit $40 billion if it is to adequately meet some of the pent up demand that has piled up since 2020 when oil prices crashed and the pandemic caused major economic lockdowns.
I was made to believe that the cost of the increments on naira was (1)the idea of having ₦500&₦1000 naira (2) low of in production (3) the high rate of taxes but no electricity to axis the local production (3) no free movement in transportation in terms of bad roads police disturbance on the road (4)insecurity in the country now the question is how and what’s the government doing to help,?