Explainer: Here’s Why Naira Is On A ‘Free Fall’ Against Dollar
Nigeria’s currency has been on a ‘free fall’ since the beginning of the year. Yesterday, January 30, 2024, and for the first time since the nation has been operating multiple exchange rate regimes, the official exchange rate fell below its street value.
According to data by FMDQ, a Lagos-based firm that calculates the exchange rate, the naira closed at 1,482.57 per dollar on Tuesday at the official market, while the parallel market traded at 1,475.
The continuous depreciation of the country’s currency, which some experts do not foresee recovering, has elicited public outcry, many of whom are facing the direct impact of the currency’s loss in value.
Reasons for the ‘free fall’:
Change in Pricing Methodology
Part of the reason why the official rate witnessed a sharp plunge of over 30 percent on Tuesday can be attributed to FMDQ revising the methodology it uses to calculate the official rate.
FMDQ, in a notice to financial market operators, said that the change in pricing methodology “aims to address recent fluctuations and challenges encountered in the Nigerian Foreign Exchange.” It added that the new measures will ensure “rates accurately reflect market conditions while upholding price formation and transparency.”
Scarcity of Dollar
Prior to yesterday, the naira had lost over 70 percent of its value since President Bola Tinubu initiated exchange rate reforms in June last year. While Olayemi Cardoso, Governor of the Central Bank of Nigeria (CBN), believes that the naira is currently undervalued, the apex bank admits that inadequate dollar liquidity has exacerbated price fluctuations.
Damilare Akanni, a financial analyst, corroborated CBN’s take on the shortage of Forex in the country.
“Although it’s saddening, the free fall of the naira is as a result of the scarcity of dollar supply,” he told Neusroom.
However, Cardoso said that the Bank is “implementing a comprehensive strategy to improve liquidity in FX markets in the short, medium, and long term.”
Part of the measures the apex bank is implementing is clearing the backlog of foreign exchange demands. The Central Bank said it had cleared all verified dollar backlogs owed to foreign airlines operating in the country after paying an additional $64 million, according to Bloomberg. However, the International Air Transport Association claimed that airlines are still owed about $700 million.
Banks ‘Unhealthy’ Exposure to Foreign Exchange
In a new directive by the CBN on Wednesday, January 31, 2024, commercial banks have been instructed to limit their foreign exchange exposures through their Net Open Positions (NOP).
“The Central Bank of Nigeria has noticed with concern the growth in currency exposures of banks through their Net Open Positions (NOP). This has created an incentive for banks to hold excess long foreign currency positions, which exposes banks to foreign exchange and other risks,” the circular reads in part.
Aimed at curbing speculation and hoarding practices, banks are to ensure that the “limit of the overall foreign currency asset and liabilities, taking into cognizance both those on and off-balance sheet, should not exceed 20% short and 0% long.”
Also, in another circular aimed to mitigate the free fall issued on Monday, CBN said that traders reporting misleading information, which affects the exchange rate, will face sanctions.
“Deliberate attempts to create price distortions by reporting false transaction details amount to market manipulation, which will not be tolerated and will henceforth face sanctions,” the central bank said.
