Exchange disparity narrows to 0.4%
By Chinwendu Obienyi
Following the Central Bank of Nigeria (CBN)’s market reforms and renewed interventions over the past few weeks, the exchange rate situation seems to be showing signs of improvement as the disparity between the Nigerian Autonomous Foreign Exchange Market (NAFEM) and the parallel market rate has narrowed down to 0.4 per cent.
According to data from FMDQ’s website, the naira depreciated by 4.9 per cent week-on-week (w/w) to N1,627.40/$1 at the official market rate, while it declined by 5.3 per cent w/w against the dollar to N1,600.00/$1 at the parallel market.
The reduction in the exchange disparity suggests a more stable foreign exchange environment as this dominance has been maintained for the second week running. The 0.4 per cent figure is significantly below the 5 per cent often considered as an acceptable premium between the official and parallel market rates.
This narrow margin, according to economic analysts, has been consistent for about 9 trading days, with a disparity as low as 0.2 per cent. The previous closest period was 8 days, from June 19 to June 30, 2023, with a disparity of 0.3 per cent.
They further noted that FX currency traders seem to be aligning their quotes with the official market rates after Binance announced plans to cease all service transactions in naira.
The cryptocurrency platform announced the decision on its website. According to Binance, naira withdrawals will be officially suspended after March 8. The development came amid the federal government’s clampdown on the crypto exchange over “regulatory breaches”.
The company, in a statement said, “From March 8, any remaining NGN balances in users’ Binance accounts will be automatically converted to the Tether stablecoin,”
The exchange also encouraged users to withdraw their naira funds, trade their naira assets or convert them to crypto before the discontinuation of these NGN services. “Please note that the conversion rate is calculated based on the average closing price of the USDT/NGN trading pair on Binance Spot in the last seven days,” Binance added.
Speaking on the development, analysts at Afrinvest, said, “We note that the spread between the NAFEM and parallel rates sustained its streak for the second week though weekly average declined 98.8 per cent to N27.40. In the week ahead, the Naira is likely to trade within a similar band across FX segments, supported by intensified regulatory spotlight”.
Analysts at Cordros Research, said that although the currency had remained under pressure given that the market supply remains frail, they are encouraged by the pace of market reforms and the apex bank’s renewed interventions – the CBN further reduced the FX backlog after providing a further $200 million during the prior week which reduces the backlog to $1.60 billion.
“In our view, as the CBN forges forward with its initiatives – which have included ensuring the naira assets are attractive to foreign participants (to drive capital importation), and domestic participants (to drive investments over speculation – and clears the FX backlog that dynamics in the FX market may improve and consequently lead to improved liquidity over the medium term”, they said.
For his part, Head, Research at FSL Securities, Victor Chiazor, said that the disparity between the rates could foster confidence of having liquidity in the market ahead of the new week.
“This development will not only foster confidence in the market but will even push foreign investors to consider Nigerian assets which could improve the liquidity of FX in the market. Also, you know with most goods and services are produced in FX, this disparity if it continues, could slow down inflation in the short term at least but my worry here is if the reforms will be sustained because if the monetary policies are the only reforms we are seeing, then it may backfire as there are other sectors of the economy that needs reforms too”, Chiazor explained.
