Naira Gains amidst Loud Calls for Devaluation

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Naira Gains amidst Loud Calls for Devaluation

Naira Gains amidst Loud Calls for Devaluation

 

  • Speculative demand impacts street FX pricing
  • Street traders quote fake FX spot rates when out of stock
  • FX quotes from unregulated traders are random

The Nigerian naira records marginal gain at the Investors’ and Exporters’ foreign exchange (FX) window amidst a loud call for devaluation of the local currency, according to data from the FMDQ platform.

In the current year, the exchange rate has been under intense pressure across FX markets due to multiple issues that surround demand and supply. Africa’s largest country by the size of gross domestic products has been unable to attract dollar inflow into the economy.

It is one thing that Nigeria’s foreign exchange earnings have underperformed expectations, a relatively higher import demand has significantly contributed to the weakening of the local currency. The battle for getting foreign currencies for business or personal use has been fierce over time.

In various interactions with MarketForces Africa, A slew of FX currencies traders maintained that the local currency is relatively overvalued amidst the Central Bank of Nigeria market intervention. “CBN is merely postponing the inevitable”, Kingsley Aigbe, a financial expert once told MarketForces Africa.

However, even with higher external reserves, some analysts believe that the weekly intervention has waned. In spite of the apex bank’s allusion to the overvaluation, Godwin Emefiele, the apex bank Governor has maintained a ‘no devaluation policy”.

While Emefiele keeps at it due to the expected impacts of local currency devaluation on the masses, the Broadstreet analysts including multilateral lenders –IMF and World bank- have maintained the need for a unified exchange rate.

Unknowing to large numbers of Nigerians, the CBN is doing them a favour as devaluation will worsen macroeconomic conditions in the short term before pressures ease.

A devaluation of the naira at this time will likely result in job losses as costs of production across the industries will spike strongly. This may force companies to reduce costs by cutting the size of their payrolls.

Also, the resultant pressures in the private sector will see most companies booking FX losses, thus reducing profitability.

In addition, the price level will worsen, and a strong decline will likely show Nigerians a road to Zimbabwe where you might have to have a large bale of Naira to buy a loaf of Bread. READ:Naira Gains as Traders Reduce FX Exposure ahead of CBN Auction

Nigeria’s inflation rate has already outrun the return on investment on naira assets. At the Investors’ and Exporters’ windows, the Naira gained 0.06% against the US dollar, rising to N445.75 from N446.

However, the parallel market rate crashed further by 4.16% to N845 from N811.25. In channel checks conducted, it was discovered that most FX spot rate figures quoted by black market traders are not true.

In some cases, MarketForces Africa discovered that street traders don’t even have dollar stocks, and go ahead and provide any rates for potential customers. Unproductive demand for dollars appears to be a key driver of the worsening naira in the parallel market.

The burden of debt payments will be exacerbated by a weakening exchange rate. Weakening currencies have further inflated the cost of foreign currency debt payments.

# Naira Gains amidst Loud Calls for Devaluation#