By Chinwendu Obienyi
There are going concerns over a remarkable reduction in Foreign Direct Investments (FDIs) and Foreign Portfolio Investments (FPIs) inflows, which has led to a depreciation in the exchange rate between the naira and US dollar by 37.6 per cent to close the month of January at N1,455.59/$1 from N907.1/$1 recorded in December 2023.
The decline in the official exchange rate (NAFEM) began on December 8, 2023 when it first crossed the N1000/$1 threshold closing at N1099.5/$1. It appreciated afterwards and then plunged again to N1,043 on December 28.
However, on January 9, 2024, it fell to an all-time low of N1,089.51/$1 closer to the black market rate of N1,245/$1.
It traded below the N1000/$1 price for the next 12 days until it fell to another all-time low of N1,348.62/$1 on January 29.
Similarly, at the parallel market, the naira also depreciated going from N1,215/$1 to N1,470/$1 to the dollar, representing a 17.3 per cent depreciation month to date.
At the time of filing this report, the naira traded at N1,442.21/$1 by 9am. Reacting to this development, analysts who spoke to Daily Sun via telephone, said that the declining value of the naira especially at the parallel market was worrisome and could deter foreign direct investments.
The FMDQ Group, which calculates the country’s official exchange rate, announced recently that it was revising its methodology to address recent fluctuations and challenges encountered in Nigeria’s highly volatile foreign exchange market, where the official exchange rate often trailed parallel market values.
Similarly, the publication of exchange rates was suspended that day.
The move is widely seen as part of market-friendly reforms being introduced by Bola Tinubu, who became president last May and who shortly afterwards jettisoned the years-long peg instituted by the former CBN Governor, Godwin Emefiele which had kept the currency artificially high.
However, the country still kept an official rate that was well above the freely-traded rate, which made it more expensive for multinational companies wanting to invest in Nigeria.
Head, Research at FSL Securities, Victor Chiazor, said, “Since the present administration floated the Naira without adequate structures in place to address FX supply, I knew we were going to struggle, however, I did not think it was going to decline to this level. I however predicted the dollar would almost get to N1000/$1”.
Speaking on the impact of this decline, he said, “Nigeria has sharply devalued its currency for the second time in eight months, in a bid to clear up its messy system of exchange rates and attract investment to its flailing economy but this has clearly pushed the official rates closer to the parallel market rate. Yes this is expected to attract FDIs but the question is when will this FX supply happen for FDIs to come in?”
Nigerians have had to grapple with a month-long depreciation of the naira as demand for FX have continued to outweigh supply across markets.
The CBN has been actively addressing issues of foreign currency speculation and hoarding by Nigerian banks.
To effectively address these issues and sanitize the market, the apex bank on Wednesday, introduced guidelines, noting that some commercial banks hold long-term positions in forex with the hope of profiting from currency depreciation .
Recently, the CBN Governor, Olayemi Cardoso, had stated that the bank will work towards real price discovery in the market as the naira is undervalued.
He also added that the bank plans to implement inflation-taming policies and collaborate with the Ministry of Finance to stabilize the exchange rate and curb inflation.