Naira plummets against U.S. Dollar, hits record low at N930/$
…Persistent weakening raises concerns amid limited reserves.
By Sodiq Adelakun
The Nigerian naira experienced a significant weakening against the US dollar, reaching N773.50 in official trading and dropping to N930 per USD on Tuesday.
The Central Bank of Nigeria reported a marginal increase of around $2 million in gross official reserves at the end of August 2023, compared to a rise of $64 million in July 2022.
However, the true level of reserves is now in question, as it was revealed that a large portion of the reserve is encumbered.
However, JP Morgan estimated net reserves to be around $3 billion, which is approximately 10 per cent of the gross reserves.
As a result, the market is skeptical of the CBN’s reserve data. The market is eagerly awaiting acting CBN Governor Folashodun Shonubi’s promise to clear a significant FX backlog that is undermining confidence in recent currency reforms.
Shonubi stated last week that the backlog would be cleared within two weeks, leaving only this week to fulfill his vow.
The exact mechanism for clearing the backlog remains undisclosed, but domestic banks are expected to play a significant role.
Shonubi did not specify whether he was referring to clearing the total backlog of $10 billion or just the forward backlog of approximately $2.5 billion.
However, sources close to the CBN revealed that Shonubi was specifically addressing the settlement of the unpaid $2.5 billion foreign currency forward contracts, which have been outstanding for six months.
“Although the exact mechanism remains undisclosed, what is clear is that domestic banks will have a significant role in this process,” said Tunde Abidoye, head of research at FBN Quest Capital.
Nigerian businesses, including manufacturers and importers, who have been waiting for dollars, are now resorting to buying the currency at a 15 percent premium in the black market.
This increased demand in the black market is complicating the Central Bank of Nigeria’s (CBN) efforts to achieve a single exchange rate.
According to sources familiar with the matter, if the CBN pays the outstanding forwards, the demand in the black market would collapse. Another source suggests that if the CBN keeps its word, the naira will sell close to the official rate in the black market, at least in the short term.
Clearing the backlog of dollars owed to local businesses is a significant step towards restoring investor confidence in Nigeria’s foreign exchange market. It also brings the country closer to benefiting from the decision made in June to allow the naira to trade at a more market-reflective rate.
The Managing Director and Chief Economist at Standard Chartered Bank, , Razia Khan believes that clearing the backlog will help reduce demand in the parallel market in the near term.
However, she is uncertain if the backlog can be entirely cleared in two weeks.
Restoring confidence in Nigeria’s FX market is crucial for boosting the dollar supply needed to support the naira.
The sharp depreciation of the currency has been particularly challenging for households and businesses, especially following the removal of a costly petrol subsidy, which led to a doubling in the retail petrol price.
