Nigeria’s Naira slips again thanks to downturn in dollar liquidity
Nigeria’s Naira is experiencing a notable downturn, marking its most severe four-day drop since a devaluation earlier this year, as available U.S. dollars become scarce.
Tuesday saw the Naira depreciate by 5.3% against the dollar, although it remains the best performer this month among currencies tracked by financial analysts, holding a 15% gain. However, in less formal markets, it’s a different story; the Naira dipped by 0.2%, cumulating a 17% drop over four trading sessions, according to Abubakar Muhammed, CEO of Forward Marketing Bureau de Change Ltd.
Dollar Drought Impacting Central Bank Efforts
The struggle for dollar availability is becoming increasingly evident, affecting the Central Bank of Nigeria’s (CBN) efforts to stabilize the Naira. In response to rising inflation, the CBN has hiked interest rates by a total of 600 basis points this year alone.
Despite these measures, trading volumes in the forex market were notably low last Friday, reaching a two-month trough at $86 million, though there was a slight recovery to $133 million by Tuesday.
Nigeria’s total dollar reserves have dwindled to $32 billion as of late April, reflecting a sharp 29% decrease over the past five years. Even with a marginal uptick noted on Monday, the reserves have been falling for 17 consecutive days, signaling inadequate dollar inflows to replenish after settling past due foreign currency obligations.
Adjustments and Predictions
Recent fluctuations in the Naira value are partly due to onshore dollar sales as traders closed their long positions, leading to an unsustainable rally, noted Samir Gadio, head of Africa strategy at Standard Chartered Bank.
The Naira has lost over 60% of its value against the dollar since last June following two major devaluations. These were intended to make the currency more market-responsive to attract foreign investment. Additional initiatives by the CBN have urged banks to increase dollar distribution to the local market, which helped the Naira rise from a low of 1,627 to 1,300 per dollar on the official market.
In a recent move, the CBN offered dollars at 1,021 Naira to bureau de change operators, which is 21% below the rate listed by FMDQ.
Ayodeji Dawodu, an analyst at Banctrust Investment Bank, expressed skepticism about the long-term effectiveness of this strategy. He anticipates the Naira might stabilize around 1,500 per dollar by year-end, potentially encouraging more robust foreign capital inflows.
The Association of Bureau De Change Operators of Nigeria (ABCON) points a finger at peer-to-peer (P2P) cryptocurrency platforms, such as Binance, for the Naira’s ongoing depreciation. Aminu Gwadabe, ABCON’s national president, highlighted the challenges posed by these platforms, noting that as long as they remain profitable, the downward pressure on the Naira will persist. P2P platforms enable users to buy USDT, a stablecoin tied to the dollar, facilitating speculative activities that impact the currency’s stability.
Moreover, despite the CBN’s recent intervention, releasing an additional $10,000 to eligible bureau de change operators, the Naira continued its decline. Concurrently, the Economic and Financial Crime Commission (EFCC) has increased its scrutiny of Binance and other cryptocurrency platforms to protect the Naira in the foreign exchange market.
Recently, Binance and two of its executives were brought before an Abuja High Court on charges of alleged fraud and currency manipulation, signaling a tightening grip on unregulated financial activities that could be affecting the national currency.
