On February 3, 2021, the exchange rate between the naira and the dollar depreciated closing at N395.50/$1 at the NAFEX (I&E Window) where forex is traded officially.
This is as dollar supply dropped by 26.2% as demand piles more pressure on the foreign exchange market and external reserve which has lost about $323 million in 11 days, according to data from CBN.
Also, the exchange rate at the black market where forex is traded unofficially maintained its stability at N480/$1. The exchange rate at the parallel market closed at N480/$1 on the previous trading day of February 2, 2021.
Why Naira is depreciating
- The weakening of the local currency can be attributed to demand pressure in the foreign exchange market as increased business activities put pressure on the greenback.
- The threat by the CBN to bar exporters who do not repatriate their dollars by January 31, from receiving banking services has failed to stop the weakening of the naira, according to Bloomberg.
- 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 CBN is seeking to avoid another round of devaluation with the implementation of policies to help conserve the scarce forex and deepen the foreign exchange market.
The exchange rate disparity between the parallel market and the official market is about N84.5, representing a 21.4% 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 against the dollar at the Investors and Exporters (I&E) window on Wednesday, closing at N395.50/$1. This represents a 50 kobo drop when compared to the N395/$1 that it closed on the previous trading day.
- The opening indicative rate closed at N395.25 to a dollar on Wednesday. This represents a 94 kobo drop when compared to N394.31 to a dollar that was recorded the previous trading day on Tuesday, February 2, 2021.
- The N397.20 to a dollar was the highest rate during intra-day trading before it closed at N395.50 to a dollar. It also sold for as low as N389/$1 during intra-day trading.
- Forex turnover at the Investor and Exporters (I&E) window dropped by 26.2% on Wednesday, February 3, 2021.
- According to the data tracked by Nairametrics from FMDQ, forex turnover declined from $71.25 million on Tuesday, February 2, 2021, to $52.59 million on Wednesday, February 3, 2021.
Oil price steady rise
Brent crude oil price hit about $58,76, highest in more than a year, on Thursday morning, as it approaches the $60-dollar mark. This is as OPEC and its allies pledged to continue to cut down on global crude oil inventories and crude stockpiles in the United States fell to their lowest levels since March last year.
The rise in oil prices is also aided by expectations that production curbs by OPEC+ would tighten the market in the first quarter.
OPEC oil output has risen for a seventh month in January after the group and its allies agreed to ease record supply cuts further, although an involuntary drop in Nigeria’s exports has limited the increase.
- OPEC and its allies agreed to pump more oil from January 1 and get back to output curb again in February amid fears of a slow demand recovery. This latest supply pact has helped oil to an over 1 year high of above $58 a barrel this year.
- 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 $36.395 million according to central bank data dated January 27, 2021.
- 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 further to $36.198 billion as of February 1, 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.
- The external reserves have increased by over $800 million 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.