The continued depreciation of the naira can be halted and reversed with deployment of bold intervention in the foreign exchange market.
Analysts also recommend that this move be complemented with lowering of foreign exchange (forex) restrictions and harmonisation of the exchange rates.
These measures, according to investment analysts and foreign exchange dealers; are the policy tools that the Central Bank of Nigeria, CBN, can urgently deploy to save the naira from experiencing another bout of sharp depreciation in the remaining part of 2022.
Their recommendations follow the CBN’s appeal to Nigerians to resist the urge of succumbing to the speculative activities of some players in the foreign exchange market.
FX trade volume drops
Meanwhile, the volume of dollars traded (turnover) in the Investors and Exporters window, the official segment of the foreign exchange market, fell by 17 per cent, month-on-month, MoM in July to $2.7 billion from N3.34 billion in June.
This is in sharp contrast to the 29 per cent MoM increase recorded in June from $2.5 billion in May.
Cumulatively, turnover in the I&E window stood at $22.8 billion, YtD representing 65 per cent, year-on-year (YoY) when compared with $13.9 billion in the corresponding period of 2021.
Financial analysis of transactions in the window as published by FMDQ showed that on a monthly basis turnover stood at $3.22 billion in January, from where it fell by 33.8 per cent to $2.13 billion in February, and up by 207.5 per cent to $6.55 billion in March.
The upward trend reversed in April as turnover fell by 59.8 per cent to $2.63 billion and down by 5.0 per cent to $2.5 billion in May. In June, turnover rose by 29 per cent to $3.24 billion and fell by 17 per cent to $2.7 billion in July.
Analysis of weekly turnover for July in the window showed that $78.86 million was traded on the only day in the first week of July. In the second week, turnover stood at $450.71 million and declined by 28 per cent to $320.65 million in the third week.
The downward trend reversed in the fourth week as turnover rose by 168 per cent to $861.65 million. However, turnover fell by 51 percent to $419.1 million in the fifth week.
Meanwhile, the naira appreciated, by N6 year-to-date, YtD in the I&E window in 7m’22.
Following the 17 per cent MoM decline in I&E turnover, the naira depreciated by N3.95 or 0.9 per cent during the month as the indicative exchange rate rose to N429 per dollar on July 30th from N425.05 per dollar at the end of June.
Similarly, the naira depreciated by N95 or 15.4 per cent in the parallel market during the month as the exchange rose sharply to N710 per dollar at the end of July from N615 per dollar at the end of June.
However, the naira depreciated in the parallel market by N150 as the exchange rate rose to N710 per dollar on July 30th, 2022 from N560 per dollar on the 31st of December 2021.
Consequently, the gap (premium) between the official exchange rate and the parallel market exchange rate widened to N281 or 65.5% per dollar at the end of July from N189.95 or 45 per cent at the end of June.
Halting naira depreciation
In their recommendations on measures that can be urgently deployed to halt the downward trend of the nation’s currency, investment analysts and forex dealers said that the CBN needs to intervene in the forex market, remove some items from the 43 items on the forex restriction list as well as harmonise the exchange rates.
While affirming that the continued slide in the fortunes of the naira is rooted in factors that can only be addressed with long term measures, they affirmed that the three measures listed above, can be deployed in the short term and will go a long way in calming the current demand pressure in the forex market.
In this regard, Peter Elege, Chief Executive Officer, PFI Capital, said, “Policy options the government should aggressively pursue to bring respite to the depreciation of the exchange rate include reduction or possible removal of fuel subsidy, curtailing crude oil theft and harmonization of the various exchange rates to prevent FX racketeering”
“Apart from dipping into reserves and ramping up its interventions to support the currency, I’m not convinced there is much the CBN can do to stop the rapid decline of the naira over the next two weeks”, said Tunde Abidoye, Head, Equity Research.
“As with any currency, the value of the naira primarily depends on supply and demand factors. Although administrative measures such as fx restriction on certain items can be utilised to temporarily stop the slide, the primary remedy still resides with the amount of forex liquidity in the system.
“What we have seen in recent times is a classic case of very low liquidity in the fx market, mainly due to several factors including the low level of export earnings, and increased demand from the political class as the election cycle gradually winds down.”
On the long term measures needed to help the naira, Abioye said: “The nation needs to start seriously considering medium- to long-term solutions, which would mean creating an environment – i.e. improving electricity, infrastructure – that encourages export diversification, especially for enterprises that are export-led in manufacturing, commodities, and agro-processing, among other industries. Services industries including health, education, and information technology must also be taken into consideration.”
According to an Asset Management Company Chief Executive who formerly headed the forex dealing department of a Tier-1 bank, the situation, though bad, is not completely hopeless.
Speaking on condition of anonymity, he said that a very strongly worded statement by the CBN Governor assuring the public of the resolve of the apex bank to defend the naira while warning against speculation will go a long way in calming the market