External Reserves Dip as Naira Resists Speculative Attacks

Nigeria’s external reserves sustained a downward movement to $39 billion, according to data obtained from the Central Bank while the naira resists further speculative attacks in the parallel market.

With record gains, Naira continues to recover from demand pressures in the black market, gaining N55 while the exchange rate improves at the investors and exporters’ FX window in the just concluded week.

Data from FMDQ Exchange shows that the local currency traded at N428.18 against the US dollar in the official window following an anti-graft agency raid on bureau de change operators for artificial repricing of the local currency in the black market.

On Friday, the nation’s external reserves printed at $39.085 billion amidst a slowdown in dollar inflows into the country despite elevated oil prices in the global market – though prices have fallen below $100 per barrel litres.

Due to a cloud of unsettled dust in the exchange rates across FX markets, the Nigerian naira has been suffering from multiple fronts. Local demand for the United States dollar has remained high coupled with an unstable FX intervention by monetary policy authority.

Click to Read: Nigeria’s External Reserves Gain $243.83 Million in 19 days

From $3.69 monthly average in the first quarter of 2020, Nigeria’s monetary policy authority has reduced FX market intervention by about 60% to $1.5 billion in the first quarter of 2022.

Rather than programmed policy plays, the Central Bank of Nigeria (CBN) has reduced its market intervention to discretionary-driven. This has worsened the naira value in the foreign exchange market.

Nigeria’s weak exchange rate plus high inflation have reduced households’ purchasing power, worsened by double-digit unemployment rate in Africa’s most populous country.

The stagflation condition results from gross domestic growth, GDP, slowdown, rising inflation and high unemployment ahead of the 2023 election, thus driving elevated costs of living.

According to the recently released data, CBN reported that its official interventions through the various FX windows declined by 7.7% quarter on quarter at the beginning of the year 2022.

In the period, data shows that market intervention to keep the naira steady averaged $1.50 billion monthly amidst higher oil prices and the Eurobond raised totalled $1.25 billion in March 2022 by the Debt Management Office.

The amount used to intervene in the FX markets was 7.4% below $1.62 billion the monetary authority deployed in the fourth quarter of 2021 when the nation’s external reserve was significantly trending downward.

In a note, analysts at Cordros Capital noted that CBN’s FX market intervention is significantly lower than the pre-pandemic level of $3.69 billion as of the first quarter of 2020. In two years starting from Q1-2020 and Q1-2022, the apex bank reduced its intervention in the FX markets by 59.35% despite growing demand for imports and low dollar receipts.

In the first quarter of 2022, CBN’s FX intervention declined across the interbank by 17.0% and the Investors & Exporters + SME + Invisibles window was down by 6.5%, while the CBN is yet to resume FX sales to the BDCs, according to Cordros Capital note.

“We are unsurprised that the parallel market premium widened to 38.5% during the review period as against 36.2% in the fourth quarter of 2021”, Cordros Capital analysts said in their market report.

“As of July, the parallel market premium widened further to an average of 49.4%, suggesting that CBN’s FX supply to the official windows has deteriorated further, with market participants patronizing the unofficial markets for their dollar needs.”, the firm stated further.

Barring a significant increase in FX supply across the different FX windows, analysts said they expect the local currency to remain pressured against the US Dollar due to a persistent increase in FX demand, recently exacerbated by the FX needs for election, education and travel purposes.

Nigeria’s FX reserve declined for the second consecutive week, decreasing by $133.52 million to $39.09 billion. The Nigerian Naira appreciated by N0.87 against the dollar from last week’s close of N429 to N428.13 at the Investors and Exporters FX window.

At the official window, the volume of dollars transacted or total turnover as of 4 August 2022 declined by 2.2% to $452.96 million, with trades consummated within the N409.97 – N446.00 band, traders’ notes showed.

However, a total of 71.92 million dollars was traded in foreign exchange at the official Investors and Exporters window on Friday. Elsewhere, at the Interbank Foreign Exchange market, the exchange rate closed flat at N430.00 amid CBN’s weekly injections of $210 million.

Of the sum, $100 million was allocated to Wholesale Secondary Market Intervention Sales (SMIS), $55 million was allocated to Small and Medium Scale Enterprises and $55 million was sold for Invisibles.

Meanwhile, the Naira exchange rate trended upward last week for all the foreign exchange forward contracts as the 1 month, 2 months, 3 months, 6 months and 12 months contracts.

Forward rates on these contracts periods gained 0.30%, 0.36%, 0.71%, 2.81% and 1.30% week on week to close at N429.31, N433.88, N438.86, N461.49 and N479.17 to a dollar in that order, Cowry Asset said in a note.

Analysts said they expect the Naira to trade in a similar band against the greenback barring any significant market distortions as the CBN continues its weekly FX market interventions.