The exchange rate between the naira and the dollar strengthened for the third consecutive day, closing at N1,534.9/$1 on the official market. This marks the strongest level the naira has reached in 7 days.
The official NAFEX rate, which serves as the average rate and benchmark rate used by the CBN, was quoted at N1,567.65 on March 1st, 2024.
The intra-day high reached N1,600/$1, while the intra-day low was N1,425/$1.
The official exchange rate has remained below N1,600 since February 28th, indicating a gradual return to stability in the official market.
Why the Naira is gaining
Checks from Nairametrics reveal that the exchange rate last traded above N1,600/$1 on February 28th, when it sold for N1,609.51/$1.
Since then, it has sold for N1,595.11 and N1,548.25 on February 29th and March 1st, respectively, establishing a trend that should reassure policymakers.
The official exchange rate fell to N1,615.94/$1 as the central bank intensified its efforts to combat inflation.
- The apex bank raised its benchmark monetary policy rate to 22.75%, sold over N3 trillion in Treasury Bills and OMO bills combined, and also introduced new guidelines for the operation of BDCs.
- It commenced the sale of forex to BDC operators while also banning over 4,000 operators for failing to meet its licensing requirements.
- CBN Governor Yemi Cardoso also hosted a virtual event with foreign portfolio investors, continuing to advocate for hot money inflows.
- The apex bank also clamped down on the cryptocurrency trading platform Binance, collaborating with security agencies to restrict their operations.
- While it is unclear if these actions are the reasons for the strengthening exchange rate, analysts suggest that a market equilibrium may be emerging.
Forex turnover in the last three days of trading has improved, averaging $250 million per day, up from $160 million per day a week earlier.
- Despite these improvements in the official market, the exchange rate on the parallel market was quoted at around N1,600/$1, according to information obtained from a cross-section of parallel market operators.
- Operators report an increase in demand at the beginning of the week, as more Nigerians looked to buy than sell.
- Nevertheless, this marks a significant improvement from the record low of N1,880 recorded on February 22nd.
Two things need attention. Inflation is high in Nigeria. This reduces purchasing power of the people. Their savings are eroded. People buy less of basic necessities. This may bring down their demand for products. It may bring down inflation. However, people should not starve.
Secondly, import of essential items becomes costlier because of currency depreciation. This will also increase inflation for no reasons of demand and supply side.
Hence, local production should be encouraged and exchange rate should be controlled effectively. Speculative forex trading should be under control.