Naira depreciation, volatility to persist in May — Analysts

By Babajide Komolafe & Elizabeth Adegbesan

THE IMF has cautioned the CBN against dollar rationing stressing that this will hamper foreign trade and investor confidence and thus slow down the nation’s economic recovery.

The warning is coming on the heels of 88 percent decline in volume of dollars traded in the Investors & Exporters (I&E) window even as external reserves declined further to $33.44 billion as at April 28, 2020.

The IMF gave this warning while reviewing the recent developments in the nation’s foreign exchange market against the country’s request for $3.4 billion Rapid Financing Instrument, RFI, facility.

In its report on Nigeria’s request titled: “Request for purchase under the Rapid Financing Instrument”, the IMF stated: “With reserves falling, staff welcomes recent steps taken by the CBN to allow greater flexibility in the Investors & Exporters (I&E) rate and narrow differences between various FX windows. With the spread across the various exchange rate windows now very narrow, this is also a good moment to immediately move to full and formal unification – e.g., by converging all foreign exchange windows to the I&E window.

“This critical step to ensuring a well-functioning market would be helped by the CBN’s calibration of its foreign exchange sales in the market at a level commensurate with protecting central bank reserves while taking into account low international oil prices and reduced FX demand. A unified and more flexible exchange rate will be an important shock absorber, especially in turbulent times – with CBN FX interventions limited to smoothing large fluctuations in the exchange rate.

“Rationing of foreign exchange – such as occurred in 2015, with damaging consequences – must be avoided as it would hamper trade and investor confidence, hence further delaying the economic recovery once the crisis passes.”

I&E window turnover falls 88 per cent in April

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Financial Vanguard analysis showed that the volume of dollars traded (turnover) in the Investors and Exporters (I&E) window of the Nigerian foreign exchange market fell sharply to $873.96 million in April from $7.55 billion in March, 2020, indicating month-on-month (MoM) decline of 88 per cent.

This represents the first MoM decline in the volume of dollars traded (turnover) in the window since January 2020. Turnover in the window stood at $5.6 billion in January 2020 from where it rose by 31 percent to $7.34 billion in February.

The upward trend continued in March where monthly turnover in the window rose by three percent to $7.55 billion. However, the trend changed when the volume of dollars traded in April fell by 88 percent to $873.96 million.

Financial Vanguard analysis of weekly turnover in the window showed that $110.24 million was traded in the first week of April. Turnover rose by 144 percent to $269.09 million in the second week and down by 48 percent to $141.02 million in the third week. The turnover rose in the fourth week by 37 percent to $193.53 million and down by 17 percent to $160.08 million in the fifth week of April.

Naira depreciation, volatility to persist

Meanwhile naira depreciated sharply in the I&E window and in the parallel market in April following the suspension of dollar sales to BDCs by the CBN effective April 2, 2020.

The naira depreciated by N1.75 or 0.4 percent in the Investors and Exporters (I&E) window as the indicative exchange rate rose to N387.3 per dollar on April 30 from N388.55 per dollar on March 31.

The naira also depreciated sharply in the parallel market as the exchange rate shot up to N462 per dollar on April 30 from N413.5 per dollar on March 31, translating to N48.5 or 11.7 percent depreciation for the naira.

While the resumption in dollar sales by the CBN this week is expected to increase dollar supply and thus reduce demand pressure, analysts stressed that the naira will continue to suffer depreciation due to devaluation fears driven by impact of low crude oil price and decline in external reserves.

Expressing this view, analysts at Cowry Assets Management Limited said: “In the new week, we expect depreciation of the Naira against the dollar, especially at the I&E FX Window amid low crude oil prices and falling external reserves.”

Similarly, analysts at Cordros Securities stated: “We understand that the International Monetary Fund (IMF) has committed to disbursing the recently approved Rapid Financing Instrument (RFI) of $3.4 billion by May. This is expected to provide short-term support for the rapidly dwindling external reserves. Irrespective, we expect the currency market to remain largely volatile,

especially as the CBN has announced the resumption of dollar sales to SMEs and payment of school fees, in anticipation of the gradual re-opening of the economy.”

Indication to the possibility of further depreciation of the naira also emerged from the discussions between the CBN and the IMF, where the apex bank committed to defending the nation’s external reserves by limiting its intervention in the I&E window.

External reserves fall to N$33.44bn

Data from the CBN showed that the external reserves declined further to $33.44 billion on April 28. This presents 13.4 percent or $5.2 billion decline from $38.55 billion at the end of 2019. This also represents $11.73 billion or 26 percent decline from a peak of $45.175 billion on June 10 last year.

The sharp decline in reserves was driven by increased dollar sales by the CBN in a bid to defend the naira in the face of increased demand for dollars by offshore investors exiting the nation’s fixed income market. The decline in reserves was in aggravated last month by the recent slump in price of crude oil, which accounts for 90 percent of the nation’s dollar earnings, implying sharp decline in dollar revenue for the country.

While the decline reserves is expected to be moderated this month courtesy of the $3.4 billion RFI from the IMF, the commitment of the CBN to defending the reserves implies lower dollar sales by the apex bank in the I&E and the parallel market through BDCs to defend the naira.

Vanguard