The downward trend in the fortune of the naira against the dollar is expected to persist this week even as the nation’s external reserve falls to the lowest level in two years.
Last week, the naira depreciated for the fourth consecutive weeks and to the lowest level in four months in the Investors and Exporters (I&E) window and in the parallel market. In the I&E window, the indicative exchange rate rose to N363.49 per dollar, last week from N363.14 per dollar the previous week, representing 35 kobo depreciation for the naira. Meanwhile, closing exchange rate of N363.49 per dollar represents the highest since August 8th, when the I&E window closed at N363.44 per dollar. Financial Vanguard analysis showed that the naira has been on the downward trend in the I&E window since November 15th when it closed at N362.58 per dollar. Since then, the naira has depreciated by 91 kobo against the dollar in the I&E window.
Similarly, the naira depreciated by 150 kobo in the parallel market last week. According to naijabdcs.com, the exchange rate platform of the Association of Bureaux De Change Operators of Nigeria (ABCON), the parallel market exchange rate rose to N360 per dollar last week, the highest in the second half of the year, from N358.5 per dollar the previous week. According to the Chief Executive Officer of a BDC company, who spoke to Financial Vanguard on condition of anonymity, the sharp depreciation of the naira in the parallel market is driven by mounting concerns over the continued decline in the external reserves. “People are just hoarding their dollars. Nobody is selling, they are worried over the continued decline in reserves”, he told Financial Vanguard. Meanwhile, the external reserves, which has been declining since July 5th fell last week to its lowest level in two years, since December 2018, when the reserves stood at $39.353 billion.
Data from the Central Bank of Nigeria (CBN) showed that the reserves dropped to $39.319 billion last week Thursday representing week-on-week decline of $298 million from $39.612 billion Thursday of the previous week. The reserves have been declining since July 5th 2019 when it stood at $45.149 billion. Since then the reserves has dropped by $5.83 billion or 13 per cent. The decline is driven by dwindling dollar earnings due to low crude oil price, reduced foreign investment inflow, especially foreign portfolio investment which accounts for 72 per cent of total foreign investment in the first nine months of this year. In addition to the above is increased dollar sale by the CBN in its bid to defend the naira in the wake of increased dollar demand by foreign portfolio investors exiting the nation’s fixed income market.
While the CBN is expected to sustain its intervention in the foreign exchange market, to defend the naira, the persistent decline in reserves is, however, causing concerns in the foreign exchange market and hence apathy to selling dollar holdings. The above implies that the pressure on the naira will persist with the risk of continued depreciation in both the I&E and in the parallel market. Vanguard