Naira weakens at NAFEX window, hits a record N416.95/$1 during trading

On February 2, 2021, the exchange rate between the naira and the dollar depreciated closing at N395/$1 at the NAFEX (I&E Window) where forex is traded officially.

However, during the intraday trading, the exchange rate traded for as high as N416.95/$1, the highest intraday trading.

This is as dollar supply rose significantly by 146.9% as demand puts pressure on the foreign exchange market.

Also, the exchange rate at the black market where forex is traded unofficially remained stable at N480/$1. The exchange rate at the parallel market closed at N480/$1 on the previous trading day of February 1, 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 pile pressure on the greenback.
  • 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 improvement in the country’s external reserve since the beginning of the year due to an increase in crude oil prices has increased CBN’s capacity to intervene in the foreign exchange market.
  • 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 N85, representing a 21.5% 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 Tuesday, closing at N395/$1. This represents a N1 drop when compared to the N394/$1 that it closed on the previous trading day.

  • The opening indicative rate maintained stability at N394.31 to a dollar on Tuesday, the same rate that was recorded the previous trading day on Monday, February 1, 2021.
  • The N416.95 to a dollar was the highest rate during intra-day trading before it closed at N395 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 rose by 146.9% on Tuesday, February 2, 2021.
  • Forex turnover increased from $28.85 million on Monday, February 1, 2021, to $71.25 million on Tuesday, February 2, 2021.

Oil price steady rise

Brent crude oil price hit about $57.40, a one-year high, on Tuesday evening, lifted by broader market strength and optimism over demand recovering this 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 11-month high of above $57 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 to $36.395 billion as of January 27, 2021. However, this is a huge improvement on the $35.373 billion that it was as of December 31, 2020.c
  • It was 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 about $1.1 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.

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