Pressure from investment outflow and huge demand for the dollar have combined to worsen the depreciating value of the naira, leaving it tumbling to a five-year low.
The naira lost 1.62 per cent against the dollar on Thursday, November 6 to peg its mid-quote at N170.05 per dollar while it closed at N11171.06 at the interbank market. At this close, the naira has depreciated 6.06 per cent since this year.
Foreign investors exiting stock and bond markets added to the selling pressure, as dollar supply could not match demand. The naira exchanged for N171.65 to the dollar despite defence measures taken by the Central Bank of Nigeria (CBN).
In reaction, the CBN banned the sale of dollar to importers of telecommunication equipment, power generators, and some categories of finished products at its foreign exchange (forex) auction, rather than shifting demand to the interbank market.
The CBN also restricted deposit money banks and discount houses from placing more than N7.5 billion each as deposits with it, swelling interbank naira liquidity.
The previous week ended October 31, the CBN had to sell intervention forex on Tuesday, Wednesday, and Thursday to reverse naira depreciation, a frantic effort that helped the currency to close the week at N164.6 per dollar.
Forex sales at the Retail Dutch Auction System (RDAS) sessions for the week rose 43 per cent to $999.88 million, from N699.94 million the previous week. The CBN sold $2.1 billion in October, and over N28.2 billion in total this year, through the RDAS.
The result is that CBN has had to draw from external reserves to defend the falling naira. The reserves dropped by $458 million from $39.521 million at the end of September. They stood at $39,063 billion a week ago, down from $39.353 billion a week earlier.
Only recently, the CBN had reviewed its outbound money transfer policy, raising the allowable threshold limit to $5,000 up from $2,000 for “person-to-person” transfers per transaction.
In other words, the maximum value for the new outbound international money transfer services was reviewed upwards from $2,000 per transaction to $5,000.
This was intended to reduce the pressure for dollar demand, an activity that invariably affects naira exchange rate.
Through this transfer window, Nigerians travelling abroad can transfer money into their naira account and cash the equivalent in dollar or in the currency of the country they are visiting.
However, customers are limited to $5,000 withdrawal per transaction daily. A source close to the CBN explained that the policy is intended to reduce dollar demand by Nigerians travelling abroad.
But despite these measures, the naira continues to depreciate in the face of dwindling oil revenue and outflow of foreign investments both in the fixed income and capital markets.
Yield in the bond market and returns in the capital market have been on reversal with the Nigerian Stock Exchange (NSE) All Share Index ASI sliding -16.54 per cent year-to-date, just as market capitalisation settled at N11.42 trillion from a peak of over N14 trillion.
Stocks witnessed a free fall with 50 stocks traded at significant losses against five that recorded marginal gains at the close of transactions on November 6. A bearish mood also dominated the Treasury Bills market as buy sentiments permeated the space.
With the exception of the 3M tenor which recorded a marginal increase in yield of 0.01 per cent, other tenors dipped in yields. The 1M, 2M, 6M, 9M, and 12M tenors shed 0.72 per cent, 0.24, 0.51, 0.43, and 0.56 per cent to peg average yield change for last week at -0.41 per cent.
A similar bearish trend was evident in the bonds market as yields on most benchmark and off-the-run bonds shed points.
A financial expert and capital market analyst, David Adonri, warned that a sustained depreciation of the naira will stoke inflation rate above single digit since the economy is import dependent.
Adonri, the Managing Director and Chief Executive Officer of Lambeth Trust and Securities, urged the CBN Monetary Policy Committee to think outside the box on how to defend the naira and tighten money supply as short term measures.
However, a bureau de change (BDC) operator, Matthew Ugwu, allayed the fears, saying the CBN is effectively defending the naira.
Ugwu, who is the Chairman of Autonomous Dealers’ Association at the Trade Fair Complex, Lagos, explained that – given the level of demand – the exchange rate would have exceeded N180 per dollar but for measures taken by the CBN.