In Nigeria, the forex turnover in the official foreign exchange market has struggled to reach the $300 million mark, a figure last seen during the initial days of forex unification.
This highlights the level of disinterest forex traders have in Nigeria’s official exchange rate market.
A detailed analysis reveals that the average daily turnover in the Investor and Exporter (I&E) window, where official forex trades occur, has hovered slightly above $100 million since the introduction of the unification policy.
Remarkably, this figure remains consistent with averages noted from the onset of the Covid-19 lockdown.
It’s crucial to differentiate between forex supply and forex turnover. The latter quantifies the overall volume of currency trades in the foreign exchange market within a given timeframe, often daily.
It encompasses a myriad of transactions, including spot, forward, futures, options, and swaps.
To exemplify, if one trader purchases $100,000 and divests €85,000, the resultant turnover is $185,000 equivalent. Another transaction with a trader buying €85,000 and selling £70,000 would generate a €155,000 equivalent in turnover.
This consistent average daily turnover of $100 million accentuates the pronounced scarcity in forex supply.
Furthermore, it underscores the prevailing reluctance among Nigerian businesses to rely on the official market for their daily forex needs, with many favouring the parallel or “black” market.
This trend not only emphasizes the market’s inability to address the estimated forex backlog of around $8 billion and swaps with banks of over $20 billion but also sheds light on the naira’s continual depreciation, which records new lows frequently.
What the data says: Nairametrics’ analysis of a 90-day trading span showed that the I&E Window last surpassed a daily turnover of $300 million on June 16th, recording $311 million.
- Subsequent to this, the turnover crossed the $200 million mark merely five times and stayed below this figure on all other days. Alarmingly, it plummeted below $100 million for an accumulated 59 days, highlighting the subdued market participation.
- Following the naira’s unification, the exchange rate disparity between the official and black markets has surged beyond 25%.
- While the official rate hovers around N765/$1, the black market rate has soared above N1020/$1.
What they are saying: Sources who spoke to Nairametrics surmise that traders are losing confidence in the official market as a reliable reference for the genuine exchange rate, thus gravitating towards the black-market rate.
- The low turnover in the I&E Window suggests that foreign investors are still reluctant to participate in the Nigerian forex market despite the unification of exchange rates.
- It also indicates that there is a scarcity of dollars in the official market as most transactions are shifted to the parallel market where rates are higher and more volatile.
The Central Bank of Nigeria (CBN) has been trying to boost liquidity in the I&E Window by selling dollars directly to banks or through interventions in the spot and futures markets.
However, these measures have not been enough to meet the huge demand for foreign exchange in Africa’s largest economy.
The latest capital importation report for the second quarter of 2023 also suggests foreign investors only brought in $1 billion in the second quarter of 2023.
Included in the amount was just $106 million for foreign portfolio investments 83.5% lower than the prior quarter.
The last time Nigeria achieved a stable exchange rate was in 2019 when capital importation per quarter averaged $4 billion
What this means: The implications of this situation are dire for the private sector. The private sector faces difficulties in importing raw materials, machinery, equipment and other essential inputs for production and consumption.
- The naira depreciation also erodes the purchasing power of Nigerians and increases inflationary pressures.
Meanwhile, in responding to a series of questions asked by members of the Senate before his confirmation, Cardoso said he would implement short-term and medium plans to achieve a stable exchange rate for Naira.
One of his efforts will be to clear the foreign exchange (FX) backlog regardless of the amount. He added that his team will employ operational and system-related measures to address the foreign exchange issues.
- “The exchange rate level is very worrisome. For a country we all dream of we need to have an exchange rate that is stable. A stable exchange rate is possible. We will implement short-term and medium-term measures to achieve this.”
While it is still early days, the central bank governor will need to present a solution that can deliver the confidence of currency traders who urgently need to improve market liquidity. Without this, the freefall of the naira will likely continue.
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