Dollar Famine Causes Naira to Weaken
The Naira will continue its downward trend this week on account of a constriction in supply of dollars thanks to a lack of interest from overseas portfolio investors. Potential investors prefer to adopt a wait and watch policy until the economy recovers because of justifiable worries that they won’t be able to find people willing to buy their holdings. According to foreign exchange traders, there is a likelihood of this happening in case currency control measures take the desired effect.
The Central Bank of Nigeria had raised interest rates on Tuesday by 200 basis points from 12 to 14 percent in order to attract foreign investors to buy local assets. As a result, the Naira touched its lowest point of 334.50 per dollar. As a matter of fact, forex traders pointed out that the Naira was being pushed even lower by investors in an attempt to see the extent to which it could fall. According to reliable sources, forex traders have wrapped up 51 deals worth a whopping $189.37 million between Monday and Thursday last week.
The 12% spread between the black market and official exchange rate for Dollar vs Naira makes it possible for the currency to keep dropping against the dollar. For instance, while the Naira closed at 312.16 against the dollar on Friday on the interbank market, it was 380 at the parallel market. Similarly, it was 292.4 and 378 the prior Friday at the interbank and parallel markets respectively. The central bank will definitely have to step in if the naira isn’t to weaken even more. It also assured investors that wrongdoers would indeed be punished.
Cowry Asset Management Limited CEO Johnson Chukwu opined that the Nigerian economy was facing a difficult situation and that CBN intervention was required on an urgent basis. The only way that the market could appeal to foreign investors would be for the interbank exchange rate to be stabilized. In fact, he pointed out that one-time intervention would not be of much help in this situation. Chukwu also stated that the exchange rate could be stabilized with the help of the $10 billion available to Nigeria from the World Bank.
Fellow African nation Ghana, on the other hand, doesn’t seem to share Nigeria’s forex woes. The Cedi will continue to stay firm, buoyed up by money from offshore investors. The Ghanaian government had sold five-year domestic bond during the last fortnight and this has attracted a lot of forex to the country even though the bond was settled on Monday. The cedi/dollar rate was 3.9620 on Friday, a stronger position than the previous week’s 3.9650. There isn’t expected to be any volatility in the cedi/dollar even though there is increasing demand from importers.
The Kenyan shilling will also gain, thanks to the surge in money from foreign investors buying up government debt. While last week the shilling closed 101.45/65 to the dollar, it is now stronger at 101.35/45. The Tanzanian shilling also received support from the tourism and agricultural industries.
Nigeria is indeed on the right path to liberalise the foreign exchange market although the results might not be available immediately.
About The Central Bank of Nigeria
Established by the CBN Act of 1958, the Central Bank of Nigeria commenced its operations in July 1959. The Central Bank of Nigeria has been instrumental in shaping up the financial credibility of the Nigerian banks. It made sure that all the banks had a capital base to the tune of 25,000,000,000.00 Naira under Charles Chukwuma Soludo governance from 2004 to 2009. Due to this, today Nigeria has one of the most advanced financial sectors in Africa.