Understanding the Naira’s Drop Despite Central Bank’s Efforts and Future Predictions
The financial landscape in Nigeria has been marked by a significant devaluation of the naira, despite the Central Bank of Nigeria’s (CBN) concerted efforts to stabilize the currency. The naira experienced a staggering 23% drop against the dollar, recording its worst weekly performance since February and igniting a fierce debate among market dealers and financial experts. This downturn resulted in the naira’s decline for four consecutive days, plummeting by 25% to N1,405 per dollar, compared to its previous appreciation to N1,140 from N1,820 per dollar over two months.
The Central Bank of Nigeria’s approach, particularly its slow pace in disbursing forex to Bureau De Change (BDC) operators, has been pinpointed as a key factor fueling this decline. This practice has intensified demand for dollars among banks and end users within the parallel market, escalating the rate at which the naira has depreciated.
A closer examination by financial analysts reveals multiple factors contributing to the naira’s reversal in value. One notable element is the manipulation by currency traders who leveraged the lower exchange rate in the parallel market against the higher official market rate. This exploitation involved buying dollars at a cheaper rate on the black market, only to resell at a premium through banks or by depositing into domiciliary accounts to capitalize on the higher official rate.
Additionally, the sluggish disbursement of dollars to BDCs by the CBN has exacerbated the situation. Reports indicate that some BDC operators have not received dollar allocations for nearly two weeks subsequent to making payments to the CBN, leading to a constrained supply in the parallel market. According to Dr. Aminu Gwadabe, President of the Association of Bureaux De Change Operators of Nigeria, the resurgence in speculative trading on platforms like Person-to-Person (P2P) exchanges has also played a significant role in heightening demand for dollars, thereby influencing the naira’s depreciation.
The absence of the CBN’s intervention in the official market for several weeks, coupled with dwindling Foreign Portfolio inflows, further aggravates the stress on the naira’s value. Nnamdi Nwizu, Co-Founder of Comercio Partners, emphasizes the importance of the CBN’s continuous market intervention and the potential impact of renewed Foreign Portfolio Investments (FPI) flows on stabilizing the naira.
In response to the fluctuating foreign exchange market, economist Muda Yusuf argues for measures to curb market volatility, which he believes fosters speculation and increases uncertainty. The erratic performance of the naira, which saw it surge to becoming the world’s best-performing currency at approximately 1,100 to the dollar after a drastic fall, underlines the volatility Yusuf seeks to address.
The future of the naira in the coming weeks hinges on the Central Bank of Nigeria’s strategies and its engagement with the market. The concerted efforts of the CBN to navigate through the speculations, manage external pressures, and fortify the currency’s value are critical to restoring stability in the foreign exchange market. As such, the financial community remains vigilant, waiting to see how these interventions will unfold and their lasting impact on the naira’s trajectory.
