In Nigeria, the official foreign exchange market has been grappling with a significant challenge—struggling to attain a daily forex turnover exceeding the $300 million threshold, a level last observed during the initial phases of forex unification.
This lackluster performance serves as a stark indicator of the waning interest that forex traders have shown in Nigeria’s official exchange rate market.
Upon conducting a meticulous analysis, it becomes evident that the average daily turnover in the Investor and Exporter (I&E) window, where official forex transactions transpire, has lingered just slightly above the $100 million mark since the inception of the exchange rate unification policy. Remarkably, this figure has remained fairly consistent, almost mirroring the averages recorded at the outset of the Covid-19 pandemic.
It is essential to distinguish between forex supply and forex turnover. The latter quantifies the total volume of currency trades in the foreign exchange market within a specified timeframe, typically on a daily basis. These transactions encompass a wide range of financial instruments, including spot trades, forward contracts, futures, options, and swaps.
To illustrate, if one trader purchases $100,000 while concurrently selling €85,000, the resultant turnover would be equivalent to $185,000. A separate transaction, involving another trader buying €85,000 and selling £70,000, would generate a €155,000 equivalent in turnover.
This consistent daily turnover of approximately $100 million underlines the acute scarcity of forex supply. It underscores the prevalent reluctance among Nigerian businesses to rely on the official market for their daily forex requirements, with many opting for the parallel or “black” market. This trend not only underscores the market’s inability to address the estimated forex backlog of approximately $8 billion and currency swaps with banks amounting to over $20 billion but also casts a revealing light on the naira’s perpetual depreciation, marked by frequent new lows.
Examining the data more closely, InfoStride News’ analysis of a 90-day trading span revealed that the I&E Window last surpassed a daily turnover of $300 million on June 16th, recording an impressive $311 million. However, subsequent to this milestone, the daily turnover crossed the $200 million threshold only on five occasions, remaining below this level on all other days. Perhaps more alarming is the fact that the turnover plummeted below $100 million for a cumulative total of 59 days, highlighting the subdued market participation.
Post the unification of the naira’s exchange rate, the disparity between official and black market rates has expanded to over 25%. While the official exchange rate hovers around N765/$1, the black market rate has surged beyond N1020/$1.
Experts and sources consulted by Nairametrics suggest that traders are increasingly losing confidence in the official market as a reliable reference for the true exchange rate. This has driven them towards the black-market rate, which often offers more favorable rates.
The persistently low turnover in the I&E Window points to foreign investors’ ongoing reluctance to engage in the Nigerian forex market, even in the face of exchange rate unification. It also underscores the scarcity of U.S. dollars in the official market, compelling most transactions to migrate to the parallel market, where rates are higher but also more volatile.
The Central Bank of Nigeria (CBN) has made efforts to bolster liquidity in the I&E Window, either by directly selling dollars to banks or through interventions in the spot and futures markets. However, these measures have not proven sufficient to meet the substantial demand for foreign exchange in Nigeria, Africa’s largest economy.
The latest capital importation report for the second quarter of 2023 further underscores these challenges. Foreign investors brought in a mere $1 billion during this period, and notably, foreign portfolio investments plummeted by 83.5% compared to the previous quarter.
The last time Nigeria managed to maintain a stable exchange rate was in 2019 when capital importation per quarter averaged a healthy $4 billion. The current situation paints a stark contrast and presents grim implications for the private sector. Businesses in Nigeria now struggle with the difficulties of importing essential raw materials, machinery, equipment, and other inputs needed for production and consumption.
The depreciation of the naira further erodes the purchasing power of Nigerians and intensifies inflationary pressures. While the challenges are considerable, the newly appointed central bank governor has pledged to implement short-term and medium-term strategies to achieve exchange rate stability. He has expressed a commitment to clearing the foreign exchange backlog and resolving currency-related issues through a combination of operational and system-related measures.
Although these efforts are still in their early stages, the central bank governor must deliver a solution that can restore the confidence of currency traders and enhance market liquidity. Without such measures, the freefall of the naira may persist, with negative consequences for both businesses and the general population.
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