The naira on Tuesday plunged to a record low against the dollar following a revision of the methodology used to set its exchange rate. This situation marks the second devaluation of the currency in seven months.
The naira depreciated by 31% to 1,413 to a dollar on Monday in the NAFEX fixing loop, the official foreign exchange window, according to data published by FMDQ, which calculates the exchange rate.
The Bloomberg, in its Roundup Wednesday, described the development as “devaluation”.
NAFEX – The Nigerian Autonomous Foreign Exchange Fixing is the reference rate for Spot FX operations in the Autonomous FX Market, which comprises recognized FX trading segments, including but not limited to the Inter-bank market.
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Reports show that the currency sank following strong demand on the official market, exceeding N1,455 quoted on the parallel market.
The latest move came after the Central Bank of Nigeria (CBN) accused traders of manipulating the exchange rate by under-reporting transaction rates.
That brings the naira closer to its parallel-market rate of N1,468, and follows a devaluation of almost 30% in June last year, as the CBN liberalised the currency regime in an attempt to attract inflows and improve liquidity.
On Tuesday, the CBN said it had cleared all verified dollar backlogs owed to foreign airlines operating in the country, after paying out an additional $64 million.
The International Air Transport Association (IATA) said that while it welcomed the payment, airlines are still owed about $700 million.
“This is exacerbated by the devaluation of the Nigerian naira, which has dropped significantly against the US Dollar,” it said in a statement.
“Airlines should not be unfairly penalized by the lower exchange rate”, it said.
Why the new adjustment
The Lagos-based FMDQ said in a notice to financial market operators that the change to the pricing methodology “aims to address recent fluctuations and challenges encountered in the Nigerian Foreign Exchange.”
It added that “The measures will ensure rates accurately reflect market conditions while upholding price formation and transparency”.
No official comment from the apex bank in relation to the latest development.
“The NAFEX fixing and closing rates were weighed down by trades going through at off-market levels”, said Samir Gadio, head of AfAfrica Strategy at Standard Chartered Plc.
“What is clear at this point is that these off-market trades are not factored in anymore, hence the jump in NAFEX”, he added.
While the depreciation has been “very significant,” dollar supply from the central bank will need to improve for the naira to stabilize or even strengthen, Gadio said.
Currency inflows from portfolio investors would follow, further supporting the naira, once short-term interest rates rise significantly, he said.
In a circular published Monday, the CBN said it had become aware of traders reporting “inaccurate and misleading information,” including under-reporting of transaction pricing, which affected the exchange rate.
“Deliberate attempts to create price distortions by reporting false transaction details amounts to market manipulation which will not be tolerated and will henceforth face sanctions,” the central bank said.
Senate summons CBN governor over naira free fall
Worried by the development, the Senate Committee on Banking, Insurance and other Financial Institutions, yesterday, summoned the CBN Governor, Olayemi Cardoso, over the state of economy and free fall of naira at the forex market.
The chairman of the committee, Senator Adetokunbo Abiru (APC, Lagos) disclosed this while speaking with newsmen after his panel met behind closed doors yesterday.
He said the committee, during the meeting, took the decision to summon the apex bank governor to brief the lawmakers Tuesday next week on what is being done to address current economic challenges, and the Naira value crisis.
Senator Abiru said the state of the economy, especially the inflation index was of great concern to the lawmakers.
BDC operators ‘close shops’ over dollar scarcity
Daily Trust reports that Bureau de Change (BDC) operators have suspended operations in Abuja and Kano over scarcity of US dollars in the country.
The Chairman of BDC operators (Abuja Chapter), Abdullahi Dauran, in a phone interview last night, said the closure of their business premises is indefinite, starting from today.
“We don’t have the dollar and people are accusing us of hoarding it. If we didn’t come to the market, the government should know who they will arrest.
“They involved crypto and Binance into dollar trading; they are the ones pricing it now. Here in Abuja we have told our customers that we will rest a little. We are worried about what is happening. We will come back and open the market, but for now we have closed,” he said.
“The dollar is today traded at less than N900, but the binance and crypto operators will tell you it is N1,400 or thereabout. You cannot sell your own in this case.
“But if government really means development, it should ban them. There was a time when they banned Twitter in the country. This, too, is causing problems and challenges in the country, hence they should ban it”, he stressed.
Another BDC operator in Kano, Nura Usman, who corroborated the development, said the dollar is getting extremely expensive following the federal government’s decision not to release the currency to them.
“The closure of operations will happen in Abuja and Kano. I can’t confirm that of Lagos but the two places are certain. These two make the majority of the market in the country, so the impact will be felt”, he said.
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