Nigeria’s foreign reserves dropped to $38.59 billion on May 25 as the Central Bank of Nigeria (CBN) sustains dollar interventions in the economy.
The reserves depreciated by 0.07 per cent $38.59 billion from $38.63 billion recorded on May 25, data from the CBN’s website has shown.
The decline in the foreign reserves can be attributed to the continuous intervention by the Central Bank in the FX market in order to ensure the stability of the local currency.
Despite the interventions, the naira has continued to depreciate closing last week at N609 to dollar at the parallel market.
The CBN had committed $3.36 billion into the foreign exchange market in two months in line with its determination to keep the naira stable.
The apex bank’s January monthly report on ‘Foreign Exchange Market Developments’ showed that $1.71 billion and $1.65 billion were injected in December 2021 and January 2022 respectively.
The naira had made marginal gain after the Monetary Policy Committee (MPC) raised interest rate by 150 basis points.
The local currency appreciated by from N610/$ to N605/$, representing N5 gain after the MPC hiked Monetary Policy Rate (MPR) from 11.5 per cent to 13 per cent per annum.
The naira is however still trading weaker than pre MPC close of N600/$ at the parallel market but remains stable at N415.72/$ at the official market.
Forex Trader, AZA Finance, Ikenga Kalu said: “We expect the naira to appreciate further in the coming days back to the N600/$. However strains are likely to persist over the medium term given ongoing dollar supply constraints,” he said.
The Central Bank of Nigeria (CBN) said its policies- naira-for-dollar incentives, stoppage of dollar sales to bureaux de change and restriction of forex sales to 43 items that can be produced locally are meant to boost dollar liquidity and create currency convergence.
The CBN Governor, Godwin Emefiele explained that Nigeria, like other emerging market countries reliant on oil exports, the retreat by foreign portfolio investors significantly affected the supply of foreign exchange into the country.
“With the decline in our foreign exchange earnings and successive exchange rate adjustments, the CBN has continued to implement a demand management framework, which is designed to bolster the production of items that can be produced in Nigeria, and aid conservation of our external reserves,” he said.
Emefiele said the the apex bank has continued to favour a gradual liberalisation of the foreign exchange market in order to smoothen exchange rate volatility and mitigate the impact which, rapid changes in the exchange rate could have on key macro-economic variables.
An economist and Managing Director/CEO Financial Derivatives Company Limited, Bismarck Rewane, explained that CBN’s efforts at naira convergence will help reduce the official-parallel market spread which will in turn decrease the incidence of speculative trading at the parallel market.
“A reduced spread will decrease the incentive (arbitrage) for speculators to obtain forex at the official market and resell at the parallel market. This may result in panic dumping of dollars at the parallel market due to the concern of lower demand for forex and appreciation of the dollar at the parallel market,” he said.
An economist, Bismarck Rewane advised that closing the gap between the official and parallel market rates is likely to reduce the demand for forex at the parallel market, pushing investors and traders to the official market. This will lead to increased forex transactions at the official market.
He explained that the wide official-parallel market spread and the low forex supply at the official market have been the main factors driving investors and traders to source forex at an expensive rate from the parallel market.
For him, reducing this spread, coupled with an improved forex supply at the official market, will decrease uncertainty (volatility) at the forex market and bolster the ability of the official window to meet a higher demand for dollars.
The resulting impact of this is that a reduced exchange rate volatility and improved forex supply will make it easier for foreign investors to repatriate their funds. It will also ensure that traders and manufacturers can access forex at a uniform rate from both the official and parallel markets.
“Reduced naira volatility and improved forex supply are positive for foreign direct investments and foreign portfolio investments as well as the country’s external trade. This is because of the increase in the volume of dollar available for foreign trade and investment,” he said.