There are indications that stability is returning to the foreign exchange market as the value of the Naira appreciates in the parallel market. The exchange rate at the Investors & Exporters (I&E) window closed last week at N386.13 per dollar, a marginal 46 kobo (0.11 per cent) depreciation Week-on-Week, WoW, against N385.67 per cent previous week, but at the Bureau De Change segment, the local currency appreciated massively by N34.8 or 7.3 per cent to N441.5 per dollar last week from N476.3 per dollar the previous week.
The exchange rates represented the first major WoW appreciation especially in the parallel market since the beginning of this year. Currency dealers also indicated that the development would be consolidated this week as the apex bank sustains the intervention by commencing its weekly injection of $100 million into the BDC segment.
The local currency had recorded bad fortune with about N74.3 or 18.4 per cent depreciation over the last five months from Thursday, March 26th, 2020 when the CBN suspended dollar sales to BDCs citing challenges faced in local and global economies due to the impact of the Coronavirus (COVID-19) pandemic.
The acute dollar scarcity triggered by the suspension caused the parallel market exchange rate to rise steadily from N402 per dollar on March 27th 2020 to N480 per dollar on August 16th, before moderating to N476.3 per dollar on Friday, August 28th 2020. Also, the depreciation trend widened the gap between the official and parallel market exchange rates to N90.63 per dollar on Friday, August 28th 2020 from N20.5 per dollar on Friday, March 27th 2020.
Director, Corporate Communications Department at the CBN, Isaac Okorafor, said that the apex bank had concluded plans to inject liquidity into the foreign exchange market by selling forex to licensed BDC operators. According to him, the sale to BDC would be gradual and be done twice a week – Mondays and Wednesdays, hence the BDCs had been directed to ensure that their accounts with their banks are adequately funded to ensure seamless transactions.
Speaking at a webinar focusing on the CBN’s resumption of dollar sales to BDCs, President of the Association of Bureau De Change Operators of Nigeria, ABCON, Aminu Gwadabe, said: “Ordinary financial transactions or funding transactions for disbursement will start this Friday, Sept. 4, in four zones.
We have Lagos, Abuja, Kano and Awka Zones; these are our four service providers; and in Port Harcourt, the Travelex Retail Nigeria are back, they are the ones to disburse foreign currency to our members in the zone. “So, we are happy to announce to CBN that our waiting areas are ready and we are engaging the payment service providers in all the five payment services areas to ensure we have a smooth operation.”
At the back of these developments, analysts have projected further appreciation of the Naira in the parallel market this week, and a further reduction in the gap between the official and parallel market exchange rates. Analysts at Lagos based Afrinvest Securities said: “We expect the exchange rates to remain range-bound at the official market and the Investor and Exporters (I&E) window.
However, due to the expected intervention of the CBN at the parallel market, we believe the currency would appreciate in the coming week.” Analysts at Cowry Asset Management Limited similarly stated: “In the new week, we expect further convergence of the exchange rates, especially between I&E window (the autonomous window) and BDC segment, as BDCs continue operations.”
While also predicting further appreciation of the naira in the parallel market, Bismarck Rewane, Chief Executive Officer, Financial Derivatives Company Limited, said: “The parallel market will appreciate towards N420 per dollar in September before sliding back towards N430 per dollar.”
Speaking during the monthly Lagos Business School Breakfast session, Rewane said: “Year-end convergence will be between N420 and N430 per dollar to clear the market while manufacturers and importers will blend and close transactions at N420/$ in the fourth quarter.”
Analysts at Cordros Securities, however, cited three factors that may reverse the appreciation of the Naira in the medium to long term. They said: “Despite the CBN’s stronger commitment towards exchange rate unification, we still see legroom for the currency to depreciate further in the medium-to-long term, at least towards its Real Effective Exchange Rate (REER) derived fair value.
“Our prognosis is hinged on (1) the widening current account (CA) position, (2) currency mispricing, which could induce speculative attacks on the naira, and (3) the resumption of forex sales to the BDC segment of the market which should place an additional layer of pressure on the reserves.”