Naira tumbles after brief rally as Nigeria dollar supply falls

The naira weakened Tuesday for a third straight day after a brief period of strength that saw it become the world’s best-performing currency.

The currency fell as Nigeria continued to face dollar shortage as its foreign exchange reserves declined to a seven-year low.

Key Points:

• Naira dropped 5.4% against the dollar on Tuesday on the official market, according to FMDQ, where foreign exchange is traded officially.
• Unofficial market saw a 1.8% decline, extending a four-day retreat of 17%, according to Forward Marketing Bureau de Change Ltd., which tracks the parallel market data.
• The volume of dollar traded remains low, dropping to a two-month low of $86 million at the weekend before rising 27% to $110 million on Monday, according to Bloomberg.

Falling reserves

Nigeria’s dollar reserves dropped continuously for 17 days to $32 billion as of April 19, the lowest since Sept. 2017, as per Central Bank of Nigeria data.

Last week, the CBN governor denied claims the bank was using up reserves to support the naira. He said the reserves after the CBN settled overdue dollar obligations and insisted the country was receiving more inflows.

The latest decline suggests that dollar inflows aren’t coming in fast enough to replenish reserves.

“The naira has been supported by onshore dollar selling as long positions were unwound, but the rally was probably overextended,” said Samir Gadio, head of Africa strategy at Standard Chartered Bank, told Bloomberg.

“A dislocation started to emerge as domestic market participants sold dollars at increasingly lower spot levels” which was not sustainable and led to a correction, he said.

Attracting forex

The currency fell from 464 to the dollar last May when the government of Bola Tinubu came to office to 1800 in February, following two devaluations since June to reform the foreign exchange market and attract more foreign capital.

In the last few months, the central bank has taken several steps to attract in more dollars and shore up the naira in the local market. These efforts, including selling dollars directly to bureau de change operators, led to the naira strengthening to 1,234 to a dollar on Monday on the official market.

To address the latest decline, the CBN offered dollars to BDCs at 1,021 naira on Tuesday, which is 17% lower than the official rate tracked by FMDQ, aiming to boost liquidity in the parallel market.

The bank sold $10,000 each to 1,583 currency exchange operators, totalling $15.83 million. BDCs are to resell at a mark-up not more than 1.5% above the purchase price.

Analysts are concerned about how sustainable this measure is in the long run.

“If the central bank is driving appreciation by selling dollars to BDCs at a lower rate, then I’m not sure how sustainable that is,” said Banctrust Investment Bank’s analyst Ayodeji Dawodu was quoted by Bloomberg as saying.