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Naira: Weak economy stems further slide

Although it has been falling steadily against the dollar in recent weeks, the naira would have suffered even more depreciation against the greenback but for Nigeria’s very weak economy, analysts at Coronation Capital have said.

 

The analysts, who stated this in a report obtained by New Telegraph at the weekend, noted that the slump in the economy, occasioned by the impact of the Coronavirus (covid-19) pandemic, has affected demand for dollars on the parallel market, thereby reducing pressure on the naira.

 

In the wake of the sharp drop in the price of oil (the commodity that accounts for over 90 per cent of Nigeria’s export earnings), coupled with the impact of the pandemic, the country’s external reserves have been on a downward trajectory, a development that made the Central Bank of Nigeria (CBN) to introduce measures aimed at curbing demand for foreign exchange. On March 26, for instance, the apex  bank, following global authorities’ implementation of coronavirus lockdown measures, including total shut down of air and land borders, suspended the sale of forex to Bureaux De Change (BDCs) until further notice.

 

Forex dealers predicted at the time that the CBN’s action would lead to an increase in demand for forex on the parallel market, especially after the government partially lifted some of the lockdown restrictions. However, the naira’s pace of decline against the dollar on that market seems to have been slower than what many market watchers predicted. For instance, after sliding to N470 per dollar a fortnight ago, the local currency has not eased to below N472/$1 since then.

 

In fact, it was unchanged at N472  per dollar throughout last week. Commenting on the issue, in their note titled, “The Mystery of the parallel exchange rate,” the Coronation Capital analysts said: “Until recently, the behaviour of the parallel exchange rate this year has been a mystery. Why did it not respond to pent-up demand for US dollars by adjusting rapidly?

 

The answer is a very weak economy. “Traders and manufacturers buy US dollars for purchases of traded goods and raw materials, and often source them from the NAFEX market (also known as Importers and Exporters Window, as well as the Interbank FX market). The problem with this market is that it does not live up to its name, the Nigerian Autonomous Foreign Exchange Market.

 

It is not truly autonomous because the CBN usually provides a back-stop of US dollar liquidity, sometimes providing hundreds of millions of US dollars per month. That is, until recently.

 

Since March turnover on the NAFEX market has slumped as the CBN has husbanded its precious US dollar reserves. “So, where has the demand for US dollars gone?

 

It would normally go the parallel market, or ‘street market’. Back in early 2017, when the Interbank FX market rate was N316/ US$1, the parallel market rate was N500/US$1 (a 58.2% difference). Yet the pressure on the parallel market rate in 2020 has been slow to arrive, and so far appears to be moderate. If the normal volume of US dollar demand were to appear in the parallel market, we would expect a bigger adjustment than this.

 

“The World Bank’s and the IMF’s forecasts for Nigerian GDP in 2020 are negative 3.2 per cent and negative 5.4 per cent, respectively. Given that the recession in 2016 was negative 1.6 per cent, this implies a very significant slowdown now.

 

And, given that we expect agriculture (22.0% of the economy) and telecoms (10.9% of the economy) not to suffer much, this implies that the trade sector (16.1% of the economy) and the manufacturing sector (9.7% of the economy) are currently losing around 20 per cent of their activity. This likely explains the lack of demand for US dollars overall,” the analysts added.

 

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