Explainer-What’s pushing the Nigerian naira to file lows? By Reuters

By Chijioke Ohuocha

ABUJA (Reuters) – Nigeria’s naira is on the point of breaching 1,000 per greenback after falling to an official file low of 999 final week, Refinitiv information confirmed, tracing its weak spot on the unofficial market the place it trades freely.

President Bola Tinubu eliminated Nigeria’s international forex controls in June in a bid to get transactions flowing via the official market once more to assist unify the naira’s change charges.

However that has solely fuelled the forex’s weak spot and added to inflationary pressures.

Here’s what you’ll want to know in regards to the naira.

WHY IS THE NAIRA FALLING?

The central financial institution has a backlog of amassed foreign exchange demand on the official market, which successfully forces people and companies to go to the black market in the event that they want {dollars}.

However greenback flows to Nigeria have been falling in the previous few years on account of declining funding and decrease exports of , which account for greater than 90% of the nation’s export earnings.

Buyers cheered when Tinubu lifted the forex controls, hoping a unified change charge would make it simpler to entry international forex, however that’s but to occur.

HOW BIG IS THE FOREIGN CURRENCY BACKLOG?

Nigeria has almost $7 billion in foreign exchange forwards which are overdue, which corporates purchased from native banks. Banks then repaid international credit score traces with their very own funds when the central financial institution didn’t pay out.

Meaning corporates are unable to get new letters of credit score, whereas the banks are owed {dollars}. New central financial institution governor Yemi Cardoso mentioned clearing the backlog was a precedence however he gave no timeline for the way lengthy it could take.

Some analysts say the ahead agreements might be rolled over by 24 to 36 months, giving the central financial institution extra time to search out the {dollars} to repay the corporates.

HOW BIG ARE NIGERIA’S FOREX RESERVES?

The nation’s foreign exchange reserves fell to $33.5 billion in September from $37 billion in January, central financial institution information exhibits.

In August, the central financial institution printed audited accounts for the primary time since 2018, and revealed that its reserves included a $19 billion dedication in derivatives – slashing the liquid quantity of the reserves.

JPMorgan calculated that the nation’s internet FX reserves stood at $3.7 billion as of the top of 2022, “considerably decrease” than prior estimates.

Nigeria’s crude extra account solely has $473,755, the Nationwide Financial Council mentioned in August, down from a peak of $20 billion in 2008, after successive governments withdrew {dollars} to assist the naira and funds spending.

WILL THE CENTRAL BANK RESTORE FOREX OPEN POSITIONS?

Nigerian banks are usually not allowed to have open positions on the greenback, which means that they can’t purchase foreign exchange for their very own account from the market or speculate on the worth of the forex.

Banks use their open internet positions on international forex to finance short-term commerce traces with out resorting to the central financial institution for bidding. Meaning banks “make the market” for {dollars} and supply two-way quotes for getting and promoting the forex, successfully creating a completely functioning foreign exchange market.

A dealer mentioned if banks had been allowed to make the market on the greenback, the native forex may weaken additional as a result of they’d promote to prospects at charges decided by demand and provide.

Nigeria’s 2024 funds assumes a benchmark change charge of 700 naira to the greenback. The finance minister says the parallel market charge of 1,300 naira doesn’t mirror the true worth of the native forex.

“On condition that the naira stays a lot weaker on the parallel market, additional devaluations – and rises in inflation – are possible,” Capital Economics mentioned in a analysis word.