A man counts Nigerian Naira banknotes at a market in Yola, Nigeria, February 22, 2023.REUTERS/Isa Alexander/File Photo Obtaining license rights
ABUJA, Oct 27 (Reuters) – Nigeria’s naira is on the brink of breaking 1,000 naira to the dollar, after falling to an official all-time low of 999 naira last week, Refinitiv data showed. We are tracking weakness in the informal market where it is traded.
President Bola Tinubu lifted Nigeria’s foreign exchange restrictions in June, with the aim of unifying the exchange rate of the naira and allowing trading through the official market again.
However, this only accelerated the currency devaluation and increased inflationary pressures.
Here’s what you need to know about Naira.
Why is the naira falling?
The central bank has a backlog of cumulative foreign exchange demand on the official market, effectively forcing individuals and businesses to turn to the black market when they need dollars.
However, dollar inflows to Nigeria have declined in recent years due to lower investment and a decline in exports of crude oil, which accounts for more than 90% of the country’s export earnings.
Investors cheered when Mr. Tinubu lifted currency restrictions, hoping a unified exchange rate would ease access to foreign currency, but that has yet to materialize.
What is the foreign currency backlog?
Nigeria has nearly $7 billion in expired foreign exchange futures that companies bought from local banks. If the central bank did not pay, banks repaid foreign lines of credit with their own funds.
This means that companies are unable to obtain new letters of credit, while banks are saddled with debt. New central bank governor Yemi Cardoso said clearing the outstanding balance was a priority, but did not say how long it would take.
Some analysts say futures contracts could be rolled over for 24 to 36 months, potentially giving the central bank more time to come up with cash that could be used to repay companies. .
What are Nigeria’s foreign exchange reserves?
The country’s foreign exchange reserves fell to $33.5 billion in September from $37 billion in January, central bank data showed.
In August, the central bank published audited accounts for the first time since 2018, revealing that reserves included $19 billion in derivatives transactions, significantly reducing the amount of liquidity in reserves.
JPMorgan estimates the country’s net foreign exchange reserves will be $3.7 billion at the end of 2022, “significantly lower” than previously expected.
The National Economic Council said in August that Nigeria’s oil surplus account was only $473,755, down from a peak of $20 billion in 2008 as successive governments raised the dollar to support naira and budget spending. did.
Will central banks restore open foreign exchange positions?
Nigerian banks are not allowed to hold positions against the dollar, meaning they cannot buy foreign exchange on their own accounts from the market or speculate on the value of the currency.
Banks use their open net positions in foreign currencies to fund short-term trade lines without relying on central bank bidding. This means that banks “market” for the dollar, providing a two-way quote for buying and selling the currency, effectively creating a fully functioning foreign exchange market.
One trader said if banks were allowed to trade in the dollar market, the local currency could depreciate further as they would sell to customers at interest rates determined by supply and demand.
Nigeria’s 2024 budget assumes a standard exchange rate of 700 naira to the dollar. The Minister of Finance said the parallel market rate of N1,300 does not reflect the true value of the local currency.
“Given the continuing significant depreciation of the naira in the parallel market, further devaluation and higher inflation are likely,” Capital Economics said in a research note.
Reporting: Chijioke Ohuocha; Editing: MacDonald Dzirutwe and Hugh Lawson
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