Why is Dollar Rising Against Naira? – See Answers Gotten from Expert

why is dollar rising against naira

Why is Dollar Rising Against Naira? – See Answers Gotten from Experts:

Dollar Rising Against Naira

The shortage of dollars in Nigeria has pushed the naira to a new all-time low of 630 against the greenback in the parallel market, despite the recent increase in the country’s external reserves.
With the current exchange rate, the naira had lost 10.32 percent of its value since the beginning of the year when it was 565 per dollar at the parallel market, popularly called the black market.

This is in spite of the increase in the country’s external reserves, which gives the Central Bank of Nigeria (CBN) the firepower to defend the naira.
The foreign exchange reserves rose to $39.22 billion at the end of June from $38.60 billion at the end of May due to the increase in inflows from non-oil sources. According to CBN data, the reserves increased further to $39.44 on July 15.

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The persistent naira depreciation has been attributed to dollar shortage in the official market, pushing more demand to the parallel market
All the analysts polled by BusinessDay were unanimous in their submission on the reason for naira weakness, which they said was increased demand to import petroleum products and others.

Access to the official forex window is becoming more difficult in the face of reduced liquidity with the government increasingly demanding more forex to import petroleum products on the back of the sustained increase in oil price,” Uche Uwaleke, professor of Capital Market and president of Association of

Capital Market Academics of Nigeria, said.

He said a lot more people now resort to the parallel market. “Also note that the CBN forex restrictions on some items are still in place. Most affected importers resort to the parallel market,” Uwaleke added.
On June 23, 2015, the CBN restricted access to foreign exchange to some 43 food and non-food items that can be produced in the country.

Uwaleke noted that demand for forex had generally increased, especially for Invisibles connected to overseas travel for summer holidays.
Invisible imports increased by 15.4 percent to $0.88 billion in February 2022 from $0.76 billion in January, according to the CBN’s monthly economic report.

The high rate of inflation is equally fuelling speculative demand for forex as more people now prefer to store their wealth in foreign currency, Uwaleke said.

Nigeria’s inflation rose sharply to 18.6 percent in June, the highest since January 2017 as prices of both food and non-food items continued upward.
“Political season is here and so it is possible that Politicians, who mostly patronize the parallel market, are buying up dollars now ahead of the campaigns,” Uwaleke added.

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Godwin Emefiele, governor of the CBN, has warned that bank customers converting the local currency to the dollar would be sanctioned and placed on Post-No-Debit.

On the supply side, Uwaleke said the parallel market is still reeling from the discontinuation of forex sales to Bureaux De Change (BDCs).

The CBN, on July 28, 2021, stopped dollar sales to the BDCs due to foreign exchange infractions and pushed sales of genuine demand for forex to the banks.

“I think the CBN can take a number of measures to stem the trend such as, increased funding of the forex market given that the country’s reserves appear healthy at over $39 billion and sufficient to finance many months of imports, take stiff measures against dollarisation of the economy thereby discouraging Politicians from openly spending dollars in Nigeria, and consider redenominating the naira, through say, knocking off two or three zeros in order to make the naira portable and more convenient for use.

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This move will discourage dollarisation,” Uwaleke said.
On his part, Taiwo Oyedele, head of tax and corporate advisory services at PwC, said it was becoming increasingly difficult to source forex from the official market, even for items that are not restricted for FX such as diesel imports, raw materials, and equipment purchase, foreign tuition and travel allowances.

He said: “This scarcity in the official market, coupled with the list of items prohibited for FX, was pushing more demands to the parallel market which inevitably means further depreciation of the naira against major foreign currencies in the absence of adequate supply.

“In addition, the interest rate normalization in the US is making the dollar strengthen against other currencies.

This is partly responsible for the recent naira depreciation in the official and parallel markets.”
Naira, on Tuesday, appreciated by 1.16 percent against the dollar at the official market after the CBN raised its benchmark interest rate by 100 basis points to 14 percent, the second time within two months.

After trading on Tuesday, the naira closed at 424.17 per dollar against 429.13/$ on Monday at the Investors and Exporters forex window, data from the FMDQ indicated. Learn more about Why is Dollar Rising Against Naira?

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