Experts Explain Why Naira Could Continue Falling Despite CBN’s Limitation Policy

Experts Explain Why Naira Could Continue Falling Despite CBN’s Limitation Policy

  • The naira rose significantly from its low after CBN's recent policies were introduced last week
  • Analysts said that the appreciation is a result of the recent changes geared towards more liquidity
  • But they hope that a more sustainable policy will help to ensure a stable currency in the long term journalist Zainab Iwayemi has over three years of experience covering the Economy, Technology, and Capital Market.

The naira rebounded last week from an all-time low, closing at N1,440/$ on Thursday and further appreciating to N1,410/$ on Friday in the unofficial market.

Experts Explain Why Naira could Continues Falling Despite CBN’s Limitation Policy
Experts opined that the series of policies may have caused the naira to drop drastically in the last trading days. Photo Credit: CBN, BDC
Source: UGC

This came after several policy changes by the apex bank to ensure liquidity in the market, strengthen the foreign exchange market in Nigeria, and encourage fund remittance via legal and authorised channels.

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Similarly, it also fixed $1 million as the minimum share capital requirement for International Money Transfer Operators (IMTOs) in Nigeria, amongst other changes.

Experts opined that the series of policies may have caused the naira to drop drastically in the last trading days of the week.

IMTOs allowed to quote exchange rates

One of the street vendors told BusinessDay that the CBN's new foreign exchange policy has increased the supply of dollars on the market and that because the Chinese, the market's biggest purchasers of dollars, are on vacation, demand for dollars has decreased.

According to the circular TED/FEM/PUB/FPC/001/009, dated September 13, 2023, IMTOs were previously required to quote rates within an acceptable limit of -2.5% to +2.5% around the previous day's closing rate of the Nigerian foreign exchange market.

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The new circular allows IMTOs to quote exchange rates for naira payout to beneficiaries based on current market rates in the Nigerian foreign exchange market, in line with the CBN's commitment to liberalise the country's foreign exchange market.

Based on willing selling and willing buyer, this is to be done.

Aminu Gwadabe, president of the Association of Bureau De Change Operators of Nigeria (ABCON), said:

“The reason for removing the cap is to incentivise the IMTOs to transfer their receipt into the country transparently.”

He said that up to this point, the IMTOs had been domiciling the actual remittance proceeds at parallel market prices in the jurisdictions of receipts rather than remitting them into the official market.

He added:

“It is hoped that with the removal of the cap on IMTOs proceeds, the diversion from the official markets of the proceeds will be reduced drastically or eliminated."

He added that this will likely increase liquidity in the market and consequently influence exchange rate stability.

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On net open position

Samuel Oyekanmi, a macroeconomic analyst, told that the net open position is the difference between the assets and liability banks have in foreign currency.

According to him, the new policy suggests that banks are now trying to profit from the instability of the naira by hoarding the naira to sell at a future time, further driving the depreciation of the exchange rate.

He said:

“Because banks are asked to keep their NOP positions to 20% long or short, those who have significant exposure in FX, Eurobond will have to sell their FX. If this influx of dollars finds its way into the market, there will be a lot of supply, and if there is supply, the exchange rate will be relatively stable. But in the long term, it is still insufficient to ensure the exchange rate is strong.

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Naira makes U-turn

Despite these changes, the naira appeared to defy the apex bank's efforts, again falling in the new week.

By Monday, February 5, however, findings by indicated that the naira further depreciated, closing at N1,415/$.

The dip in foreign currency has, however, raised concerns about sustainability for stakeholders and players in the industry

Gwadabe said:

“We call on the management of the apex bank to sustain the tempo. There is an urgent need in the immediate time to consider the effective transmission mechanism roles of the BDCs through their inclusion as the third leg of the market.”

Like Gwadabe, Oyekanmi also hopes that a more sustainable policy will help ensure a stable currency in the long term.

He said:

“For the short term, we expect to see more liquidity in the market, which will drive the exchange rate down a little bit or strengthen the naira. But that does not appear sustainable because we still do not have much FX coming into the system, and we need to ensure the market has liquidity and prices are fair rather than speculative trading.

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CBN finally finds solution to naira woes reported that the governor of the Central Bank of Nigeria (CBN), Yemi Cardoso, earlier disclosed that the bank discovered $2.4 billion invalid foreign outstanding claims.

He said the development had been pressuring the naira and unsettling the currency market for a while.

In an interview with Arise TV station aired on Monday, February 5, Cardoso stated that the CBN engaged Deloitte to look into the FX accusations to obtain an accurate picture of the situation.


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