Naira faces decline to 2.23% as demand for Dollar soars
By Sodiq Adelakun
Naira has experienced a significant decline of 2.23 per cent against the dollar in the past month.
This depreciation can be attributed to the persistent rise in demand for the greenback in the parallel foreign exchange market segment.
As a result, the country’s external reserves, which provide the Central Bank of Nigeria (CBN) with the necessary resources to defend the Naira, have steadily decreased.
Recent data from the CBN reveals that Nigeria’s foreign exchange reserves have declined by 0.53% to $33.74 billion as of August 24, 2023, compared to $33.92 billion recorded on August 3, 2023.
Furthermore, the reserves have experienced a year-to-date decline of 8.47%, falling from $37.06 billion on January 3, 2023, to $33.92 billion as of August 4, 2023.
Data collected from Abokifx and street traders indicate that the exchange rate for one dollar reached N915/$1 during intraday trading on Monday, a significant increase from the N895/$1 rate observed earlier in the month (August 5, 2023).
Last week, the Naira’s value against the dollar weakened by 526 basis points, closing at N778.42/$ at the Investors and Exporters FX Window, which is Nigeria’s official foreign exchange market.
In response to these developments, the CBN released a new operational guideline for the sale of forex by Bureau De Change (BDC) operators on August 18, 2023.
According to the new guideline, the spread on buying and selling by BDC operators must fall within an allowable limit of -2.5% to +2.5 per cent of the Nigerian foreign exchange market window’s weighted average rate from the previous day.
This move by the CBN aims to regulate the activities of BDC operators and ensure stability in the foreign exchange market.
The decline in Nigeria’s currency and the decrease in the country’s foreign exchange reserves highlight the challenges faced by the CBN in maintaining the value of the Naira.
The rise in demand for the dollar can be attributed to various factors, including increased importation, capital flight, and a lack of confidence in the Naira.
To address these issues, the CBN may need to implement additional measures to stabilise the currency and boost foreign exchange reserves.
The decline in the Naira’s value against the dollar has implications for the Nigerian economy, including increased inflationary pressures and higher costs of imported goods.
Furthermore, it may discourage foreign investors and impact the country’s ability to attract foreign direct investment.
The CBN’s ability to defend the Naira and stabilise the foreign exchange market is crucial for Nigeria’s economic growth and development.
Efforts to diversify the economy and reduce dependence on oil exports should also be prioritised to mitigate the impact of currency fluctuations.
In conclusion, Nigeria’s currency, the Naira, has experienced a decline against the dollar due to a rise in demand for the greenback.
This has led to a decrease in the country’s foreign exchange reserves. The CBN’s new operational guideline for BDC operators aims to regulate the foreign exchange market.
Additional measures may be necessary to stabilise the currency and attract foreign investment. Diversifying the economy is also crucial for long-term stability.
The demand for dollars primarily came from importers who were unable to obtain foreign exchange from the official segment.
These importers needed dollars to pay for their imported goods and services. Due to restrictions or limited availability of foreign exchange in the official segment, they had to turn to alternative sources to fulfill their dollar requirements
In the same vein, individuals who wanted to travel for various purposes such as business, tourism, medical treatment, or education also contributed to the demand for dollars. These individuals needed dollars to cover their expenses abroad, including accommodation, transportation, and other personal expenses.
As the official segment might not have been able to meet their foreign exchange needs, they had to seek alternative means to acquire dollars.
Overall, the demand for dollars from importers and individuals seeking foreign exchange for travel purposes was driven by the limited availability or restrictions in the official segment.
These segments had to rely on alternative sources to fulfill their dollar requirements, highlighting the importance of a well-functioning foreign exchange market to meet the diverse needs of the economy.
