Naira has fallen to a record low of N1,515 per dollar following strong demand on the parallel market, also known as the black market.
This represents 1.32% or N20.00 weaker than N1,495 it traded in the morning today according to Nairametrics tracker.
This despite analysts’ optimism that the new FX rules by the apex bank would shore up dollar supply from commercial banks and stabilise naira in the immediate terms.
The Central Bank of Nigeria (CBN) had yesterday released a new circular addressing suspected cases of excessive foreign currency speculation and hoarding from Nigerian banks.
The current depreciation is unparalleled and stands as the lowest point in the historical performance of the Naira, reflecting the severity of the current economic challenges.
key factors contributing to the depreciation
Market analysts attribute the recent decline to a sustained uptick in demand for the US dollar observed since the beginning of January.
- A significant portion of the increased demand stems from businesses actively replenishing inventory or procuring raw materials, leading to a greater need for foreign exchange.
- Individuals pursuing higher education overseas have also played a substantial role in driving the demand for dollars. This trend is likely linked to the necessity of tuition payments and associated educational expenses.
- The departure of Nigerians residing abroad, particularly noticeable post-holiday season, has further contributed to the heightened demand for foreign currency. The exodus of individuals from the US and other foreign jurisdictions has notably impacted the parallel market.
- As educational institutions overseas resume classes, international students are actively bolstering their foreign currency reserves to cover upcoming tuition fees and other financial obligations. Additionally, students are securing funds for discretionary spending, such as holiday allowances.
The unprecedented depreciation marks the lowest point in the naira’s history against the US dollar, raising concerns about potential economic ramifications.
It was reported that the exchange rate between the naira and dollar closed the month of January at N1,455.59 representing a whopping 37.6% depreciation in one month.
According to Nairametrics data, the exchange rate closed at the end of December 2023 at a rate of N907.1/$1.
At the black market, the exchange also depreciated going from N1215 to N1470 to the dollar representing a 17.3% depreciation month to date.
Nigerians have had to grapple with a month-long depreciation of the naira as demand continued to outpace supply across markets.
The recent fall in the official exchange rate began on December 8th 2023 when it first crossed the N1000/$1 barrier closing at N1099.5/$1. It appreciated afterward and then plunged again to N1,043 on December 28th. By January 9th, it fell it an all-time low of N1,089.51/$1 closer to the black-market rate of N1,245/$1.
The Central Bank of Nigeria (CBN) has released a new circular addressing suspected cases of excessive foreign currency speculation and hoarding from Nigerian banks.
The new circular introduces a set of guidelines aimed at reducing the risks associated with these practices.
The circular, titled “Harmonisation of Reporting Requirements on Foreign Currency Exposures of Banks,” highlights the CBN’s concerns over the growing trend of banks holding large foreign currency positions.
- “The Central Bank of Nigeria (CBN) has noted with concern the growth in foreign currency exposures of banks through their Net Open Position (NOP). This has created an incentive for banks to hold excess long foreign currency positions, which exposes banks to foreign exchange and other risks. Therefore, to ensure that these risks are well managed and avoid losses that could pose material systemic challenges, the CBN issues the following prudential requirements”
In simple English, the central bank believes some commercial banks hold long-term positions in forex with the hope of profiting from it especially when there are forex fluctuations.
- For example, a bank borrows or buys $ 1 million worth of forex but then holds half of it in its position instead of lending it or using it to finance purchases for its clients immediately.
- What this means is that banks can profit from currency depreciation if they buy the forex low and sell high.
This practice, known as speculation, involves buying or holding foreign currencies in the hope of profiting from fluctuations in exchange rates. However, this behavior can expose banks to significant risks, including exchange rate volatility and potential financial losses.
Optics: Commercial banks in Nigeria have profited massively from forex revaluation gains since 2023.
- As such, most analysts believe some of the banks may be deliberately buying forex and then holding it long enough to sell when it depreciates.
- In some cases, some banks can buy forex from the CBN with plans to sell to customers but they do not sell and instead hold the forex. Once the currency depreciates, they make money.
To address these issues, the CBN has issued prudential requirements that banks must follow. A key focus of these requirements is the management of the Net Open Position (NOP).
- The NOP measures the difference between a bank’s foreign currency assets (what it owns in foreign currencies) and its foreign currency liabilities (what it owes in foreign currencies).
- The circular mandates that the NOP must not exceed 20% short (owning more than owning) or 0% long (owning no more than the bank’s shareholder funds not reduced by losses) of the bank’s shareholders’ funds.
- This calculation must be done using the Gross Aggregate Method, which provides a comprehensive view of the bank’s foreign currency exposure.
- Furthermore, banks with current NOPs exceeding these limits are required to adjust their positions to comply with the new regulations by February 1, 2024.
- Additionally, banks must calculate their daily and monthly NOP and Foreign Currency Trading Position (FCT) using specific templates provided by the CBN.
Nairametrics
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