Nigeria’s fx buffer falls 7.4% YTD, analysts see naira devaluation in 2021
By Oludare Mayowa
Nigeria’s foreign exchange reserves declined 0.69 percent month-on-month to $35.66 billion by August 27, data from the Central Bank of Nigeria (CBN) has shown.
In its latest update on foreign exchange buffer, the bank data showed that the country’s forex reserves were down 7.44 percent year-to-date.
The reserves stood at $35.91 billion by July 27, and $38.53 billion on January 4, this year while it was $35.91 billion a month earlier.
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The nation’s foreign exchange buffer has consistently declined since June 4, when it peaked at $36.59 billion by May 29, due to dollar inflows from money recovered from Late Sani Abacha loots and the disbursement of credit facilities from the International Monetary Fund (IMF) to support the country’s balance of payment.
The Nigeria forex also declined 20.64 percent year-on-year from the $44.94 billion the reserves level last year.
Nigeria is currently struggling with a dollar shortage arising from the sharp drop in revenue from crude oil exports, which accounts for 90 percent of foreign exchange earnings by the country.
The CBN had since March rationing dollars to the essential sectors of the economy to purchase medical consumables and products and other raw materials to keep the economy going.
But many forex end-users are groaning as they could not access enough dollars to either purchase raw materials and machinery for their productions, while offshore investors could not repatriate their dividends back to their home countries.
Many offshore investors portfolio investors that have tapped the country’s debt and equity markets have been on queue to buy dollar to enable them to move their funds to their country due to the inability to of the CBN to sell dollar to them.
Analysts said the impact of the currency crisis has shown in the exchange rate of the naira, which has depreciated at both official and parallel markets.
The CBN had devalued the naira twice this year, first in March when it adjusted the rate to N360 to the dollar from N307 per dollar and then in July when it devalued the currency to N380 per dollar in a bid to merge the multiple exchange rates in the country.
Despite the attempt at unifying the exchange rate, the naira is currently trading at N470 to the dollar on the parallel market and N385 per dollar on the Investors and Exporters’ (I&E) window as of Monday.
The rate of exchange on the two markets was far apart from the N379 to the dollar being quoted at the CBN window.
Analysts at the Bank of America expect the naira to decline further in 2021 as the economic activities pick up after the lockdown imposed in the wake of the outbreak of the coronavirus pandemic.
Nigeria’s current foreign exchange pressure is likely to gain momentum in 2021 as the economy and imports recover while it said the increase in economic activities could trigger a future adjustment of the nation’s currency to N430/$ next year, Bank of America analysts Rukayat Yusuf and Andrew MacFarlane said in its the global bank’s latest report looking at Nigeria’s FX unification and shortages.
“We estimate NGN fair value at 451/$, implying 15% overvaluation from current levels. Our baseline is for a 3.5% recession, 13.2% inflation and current account deficit of 3.9% of GDP this year. CBN to remain on hold with a 6% deficit covered by foreign loans and domestic issuance,” analysts Rukayat Yusuf and Andrew MacFarlane said in the bank report.
The Director-General of the Lagos Chamber of Commerce and Industry, Muda Yusuf said In July that the dollar shortage is hitting most of its 2,000 members hard.
“If the situation persists it will lead to lay-offs, If you are not producing, there will be a shortage of goods in the market, prices will go up,” Yusuf told a news agency in the week.
Many companies are not resorting to source their dollar needs from the black market, where the naira trades at around 20 percent below the official rate, making dollar purchases even more expensive.