Demand pressure: CBN maintains intervention in FX market for rate stability
By Sodiq Adelakun
In an effort to alleviate demand pressures and ensure exchange rate stability, the Central Bank of Nigeria (CBN) has continued its intervention in the foreign exchange market, according to the half-year financial markets report.
The apex bank sold a total of US$6,439.33 million in the market, with spot sales accounting for US$1,557.47 million and forward sales amounting to US$4,881.86 million.
The spot sales included US$612.41 million sold at the inter-bank Secondary Market Intervention Sales (SMIS) window, US$455.31 million sold to Small and Medium Enterprises (SMEs), US$441.75 million for Invisibles, and US$48.00 million sold at the Investors and Exporters (I&E) window.
Additionally, the CBN purchased a total of US$655.53 million in the foreign exchange market.
Since the unification of all official foreign exchange windows, the Nigerian Naira has experienced a depreciation of 39.6 percent against the US dollar.
As of 10 October 2023, the exchange rate stood at N765.83/$, compared to the pre-policy rate of N462.88/$ at the I&E Window.
The CBN’s intervention in the foreign exchange market aims to address the challenges posed by high demand for foreign currency and stabilise the exchange rate. By selling significant amounts of foreign currency and purchasing a smaller amount, the apex bank aims to meet the demand for foreign exchange while managing the depreciation of the Naira.
The depreciation of the Naira against the US dollar has implications for various sectors of the Nigerian economy.
Importers face higher costs for imported goods, which can lead to increased prices for consumers. However, exporters may benefit from a weaker Naira, as their products become more competitive in international markets.
The CBN’s intervention in the foreign exchange market is a crucial tool in managing the exchange rate and ensuring stability in the Nigerian economy.
As the apex bank continues to monitor market conditions and adjust its interventions accordingly, stakeholders will closely watch the impact on the exchange rate and the overall economy.
However, the shocks of the policy have been more pronounced at the parallel market leading to a steep depreciation of the Naira to N1020/US$ on 10 October 2023.
With little control over the depreciation of the nation’s currency, the then acting governor of the Central Bank of Nigeria (CBN), Mr. Fola Shonubi, announced plans to put in place new policies that would guide the dealings of FX to boost supply in the market.
Apparently, the measures put in place have not been effective as demand for FX continues to rise amidst an acute shortage of supply.
We have always argued that while we believe the unification of the various FX rates is a pro-market policy that will be positive for the economy in the long term, the short to medium-term impact will be hard too hard on the average consumer.
A focus on rate convergence without structural reforms to increase the supply of FX will be a case of treating the symptoms while ignoring the underlying cause of the problem which is an acute shortage of supply amidst a growing demand for FX.
