Naira’s Sudden Recovery: How Sustainable?

The naira has seen unprecedented volatility in the past week after the Central Bank of Nigeria (CBN) announced the redesigning the larger Naira denominations, with the existing ones no longer acceptable as legal tender after January 31, 2023.

The news created a panic in the forex market as speculators envisaged that politicians who had stockpiled cash at home ahead of the 2023 general elections will be converting their funds into dollars. Many believed that the value of the naira, which was around N730 before the announcement, would crash to N1000 to the dollar before the end of this month.

Consequently, speculators begun stockpiling the greenback causing an artificial spike in demand for the dollar which was already hard pressed. This saw the value of the naira crash from N730 to nearly N900 within days.

However, the table turned on speculators as last week, the naira took back control at the parallel market, as dollars flooded the market taking the naira back to N680 to the dollar by the close of business on Friday.

The recovery of the naira could be connected to rumours that went rife during the week that officers of the Economic and Financial Crimes Commision (EFCC) are patrolling and arresting roadside money changers and bureau de change operators. Also, there was rumour that the United States Federal Reserve is phasing out dollar bills that are printed earlier than 2021.

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Although the latter news has been factchecked to be false, the impact on the naira has been positive so far. At the close of business on Friday, the value of the naira on the streets stood around N680 and N690 to the dollar as against N870 which it opened on Monday.

The federal government had also given its backing to the CBN, saying, there is no going back on the decision to redesign the Naira as a strategy to curb hoarding, round-tripping.

According to the FG, the decision will help clip the wings of currency speculators who are fueling rising demand for the dollar across all market segments. Consequently, this prompted the EFCC to begin clamping down on some currency traders.

Going forward, analysts at Cowry Assets Management Limited said, they expect that, “in the coming week, we anticipate the calm to continue across all segments of the forex market barring any distortion in the market and coupled with the fact that traders will look to offset their dollar holdings at a discount.”

The trend of the naira remaining strong, according to feelers from BDCs, is expected to continue with the naira regaining value. This means that the gap between the value of the naira at the official and parallel market as to an extent been narrowed.

At its lowest around N880 at the parallel market, the spread had grown to nearly N450 as the official rate remained around N446 despite all the turmoil in the foreign exchange market. However, as the value of the naira gained strength, the spread has so far reduced to N232.

The wide gap between the official and parallel market value of the naira has remained a cause for concern to many as it creates room for arbitrage in the market.

According to the head of financial institutions ratings at Agusto&Co, Ayokunle Olubunmi, there is nothing that can be done to address arbitrage, until the gap between the official and parallel markets are closed or brought closer.

“We have heard that the EFCC is going after those people but history has shown that it cannot be effective. The best thing is to remove that opportunity. Once there is a huge difference between the official and parallel market, people will always do whatever they can do to take advantage of the arbitrage. There is so little that can be done as long as that incentive is there, people will find a way around the system to ensure that they take advantage of it.

“As an exporter you want me to sell at official rate of N440 when I know I can sell outside at N900 which is more than double the price, I will do whatever I can to enjoy that rate. So, the best thing is to try and eliminate that incentive,” he said.

Analysts at Cordros Capital believe that further adjustments in the naira to dollar peg closer to its fair value and flexibility in the exchange rate would significantly attract foreign inflows back to the market. Forex liquidity conditions remains weak at the Investors and Exporters Window (I&EW) despite the CBN’s efforts at boosting inflows to the I&EW through incentivising non-oil exports.

Expressly, inflows into the I&EW declined to their lowest level since April 2021, falling by 41.2 per cent month on month to $676.80 million in October, as against September figure of $1.15 billion.

Analysts at Cordros in an emailed note said: “on the one hand, the inflows from foreign investors declined for the fourth consecutive month to $72.0 million – the lowest print in 19 months, given the lack of reforms in the forex framework, higher global interest rates and, weak macroeconomic narratives.

“On the other hand, domestic investors’ inflows declined by 42.5 per cent month on month to $604.80 million as the euphoria from exporters’ inflows cooled.

short-to-medium term, we do not expect liquidity conditions to retrace towards pre-pandemic levels due to still weak inflows from foreign investors.

“We think foreign investors will need more convincing actions from the CBN as regards flexibility and clarity in the foreign exchange framework before a resurgence of interest in the market, as witnessed in 2017 when the IEW was established.”