Official NAFEX Market Witnesses Astonishing N632/$1 Exchange Rate
“Record-breaking” NAFEX Exchange Rate Hits N632/$1, Black Market Depreciates Further
The official Nigerian Autonomous Foreign Exchange Rate Fixing (NAFEX) window witnessed an astonishing exchange rate of N632/$1, reaching an all-time high for intra-day rates since its establishment in 2017.
However, the official closing rate on Friday, May 26, 2023, settled at N464.51/$1, showing a slight appreciation of 0.02% compared to the previous day’s rate of N464.59/$1.
The significant gap between the official closing rate and the peak intra-day rates reveals that traders were willing to pay a substantial premium above the Central Bank of Nigeria (CBN)-induced closing price, indicating a market demand for foreign currency.
Despite the CBN’s efforts to stabilize the exchange rate through increased interventions in various foreign exchange market segments, the interventions have proven inadequate to meet the demand for foreign currency, resulting in a depletion of external reserves.
External reserves, as of May 23, 2023, amounted to $35.1 billion, experiencing a decline of $1.9 billion from December 2022 ($37 billion). The drop was attributed to transactions in the foreign exchange market and minimal accrual to reserves from crude oil exports, according to the CBN.
Simultaneously, the black market rate continued to worsen, reaching N780/$1 on Friday, May 26, 2023. This represents a 1.96% decline compared to the previous day’s rate of N765/$1. The persistent depreciation of the black market rate reflects mounting pressure on the naira due to increased import demand, low oil prices, weak remittances, and capital flight.
The widening gap between the official and parallel market rates poses a significant challenge for the CBN and the federal government, especially as a new government is set to take over. Factors contributing to this disparity include liquidity challenges, speculative activities, and growing forex demand due to import reliance.
The current situation places the CBN under intensified pressure as they strive to manage the country’s exchange rate amidst inflation concerns and a troubled economy. Nigeria’s foreign exchange policy has long been a contentious topic, and these latest developments are expected to intensify ongoing debates.
At the recent Monetary Policy Committee (MPC) meeting held on May 24, 2023, the CBN expressed optimism that the progress made with initiatives such as RT200 and Naira-for-dollar, aimed at attracting trade and diaspora remittances, would continue to bolster reserve accretion and enhance liquidity in the foreign exchange market.
However, the scarcity of forex suggests that investors are choosing to keep their money abroad rather than repatriate it into the country. Fiscal pressures resulting from lower crude oil sales further limit the CBN’s ability to protect against short-term depreciation.
Experts are concerned that the continued decline of the Naira may exert additional pressure on the country’s already high inflation rate, currently standing at 22.22%. It could also adversely impact Nigeria’s foreign reserves, posing further challenges to post-COVID-19 economic recovery. The long-term implications of this depreciation could be profound, affecting import costs, and external debt repayment, and potentially causing financial distress for businesses and individuals reliant on foreign exchange.
Given the current economic climate characterized by high inflation and limited dollar inflows from foreign investors, it is crucial for investors and businesses to stay well-informed and prepare for potential volatility in the foreign exchange market. Amidst these uncertain times, stakeholders are urged to exercise caution while making foreign exchange decisions.
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