Naira Crash Due To Higher Dollar Demand, FX Supply Gaps

The naira crash to about N630 to dollar at the parallel market has been linked to higher dollar demand and foreign exchange (FX) supply constraints.

However, the dollar to naira exchanges at N415.75 to one dollar, representing over N200 per dollar premium between the official and parallel markets.

FX Trader, AZA Finance, global forex dealers, Ikenga Kalu, said the naira plunged further against the dollar this week, hitting a fresh record low of 630 from 622 at last week’s close.

He said the Central Bank of Nigeria (CBN) recently raised interest rates by 100 basis points to 14 per cent, a three-year high and its second consecutive hike this year.

“The latest move comes as annual inflation hit a more than five-year high of 18.6 per cent in June. Prices of basic staples continue to rise. The government finally caved to demands from petroleum marketers to increase gasoline prices amid tighter supply, raising the cost of a litre of petrol to between N170 and N190 from N165 – a move that has eased queues at filling stations,” he said.

“According to him, bread makers are protesting against their surging costs – flour, sugar, diesel – by suspending production. Against this backdrop and amid higher dollar demand and ongoing FX supply constraints, we expect the Naira to lose further ground in the coming days,” he said.

Also, a Lagos-based Bureaux De Change (BDC) operator, Abudul Hassan, said the parallel market is where the dollar demand pressure has migrated to, as the CBN finds it difficult to meet demand at the official markets.

“The volume of dollars demanded by walk-in-customers peaked. We expect the naira to continue its fall in the next few weeks as dollar liquidity in the system continues to nosedive,” he said.

Other analysts said the surging price of oil – Nigeria’s biggest export earner – has less effect in the parallel market since the Central Bank of Nigeria (CBN) cut off intervention in the unofficial market.

For them, campaigns for next year’s general elections will further increase foreign portfolio outflows and cause Foreign Portfolio Investors (FPIs) to remain on the sidelines.

They also listed other factors expected to cause further outflow to include rate hikes and capital controls by the monetary authorities.

As part of its longer term FX strategy, the CBN announced a rebate scheme to raise $200 billion in earnings from non-oil proceeds over the next three-to-five years by incentivising exporters to repatriate and then sell dollars into the local market.

Global Chief Economist, Renaissance Capital (RenCap), Charles Robertson, said Nigeria is in a difficult position and need to increase its dollar earnings and other revenue to support the economy.

He said Nigeria should hike taxes, raise more revenue as the country’s position is very tough that has not been seen in three decades.

Robertson, who is also RenCap’s Head Macro-strategy Unit, added: “Things are not looking pretty good for Nigeria and other emerging markets. Oil production in Nigeria has fallen so badly in the last few years and oil prices is also about falling more.We are going to see disinflationary policies coming because we are approaching recession.”