The Central Bank of Nigeria (CBN) has released alarming data showcasing the severity of the dollar supply shortage as the nation grapples with one of its worst currency depreciations in recent history.
According to the latest figures published in the CBN’s annual bulletin, a mere $9.8 billion was provided by the central bank through the official Investors’ & Exporters’ (I&E) window in the entirety of 2023. This staggering low marks the lowest dollar supply since 2017, a year riddled with a similar foreign currency crisis. In 2017, the central bank allocated just $9.3 billion to the official market segments, a consequence of dwindling dollar inflows following a decline in crude oil earnings. The preceding year, 2016, witnessed the lowest supply in over a decade, standing at a meager $6.3 billion.
An in-depth analysis of the 2023 data reveals a concerning trend. Out of the $9.8 billion disbursed by the CBN, a significant portion amounting to $6.1 billion, constituting 62% of the supply, was provided during the initial five months of the year, coinciding with the Buhari administration under the stewardship of Godwin Emefiele as CBN Governor. However, the subsequent Tinubu administration heralded the unification of the naira, signaling a paradigm shift in Nigeria’s foreign exchange policies.
By June 15, 2023, the official exchange rate experienced a substantial depreciation, plummeting from N471/$1 to N702/$1. This depreciation wave subsequently rippled through both the official and parallel markets as the supply in the official window dwindled.
Between June and October 2023, data from the CBN reveals a stark reality: only $2.4 billion flowed into the official market from CBN sources. The most precipitous drop occurred between August and October, with a meager $605.45 million supplied to the official market, with October recording zero inflows. This significant decline in forex supplies undoubtedly fueled exchange rate volatility in the latter half of the year, resulting in substantial depreciations and a glaring disparity between the official and parallel markets.
For instance, as of August 1, 2023, the exchange rate in the official window stood at N789/$1, while the parallel market hovered at N872/$1. By the close of October 2023, the parallel market had breached the psychological N1,000 mark, trading at N1,150, while the official window hit an unprecedented low of N993.8/$1 on October 30th, 2023. As the year drew to a close, an additional $1.27 billion and $61.7 million were supplied in November and December, respectively.
The exchange rates in both the official and parallel markets concluded December at N907/$1 and N1,215/$1, respectively, culminating in a tumultuous year for the local currency.
Nigeria currently operates a market-driven exchange rate policy, wherein supply and demand dynamics dictate the exchange rate. This managed float system heavily relies on the central bank’s role in forex inflow into the official market. Notably, recent data suggests an influx of over $3 billion in recent weeks, primarily attributable to foreign portfolio investors purchasing treasury bills and Open Market Operation (OMO) bills.
Despite these inflows, historical data indicates that Nigeria requires a substantial influx of forex, particularly in the official market, to maintain liquidity. Estimates suggest an annual requirement of between $25 billion to $30 billion from the central bank and an additional $40 billion to $60 billion annually from autonomous sources to achieve a stable exchange rate.
In response to Nigeria’s forex challenges, Central Bank Governor Olayemi Cardoso outlined strategies and measures aimed at mitigating the crisis. These include transitioning from a reactive stance to strategic planning, focusing on creating an efficient, transparent FX market, prioritizing liquidity by unifying the naira exchange rate, and streamlining capital flows. Governor Cardoso also highlighted the influx of foreign portfolio investment as a positive sign and aims to double diaspora remittances as part of the CBN’s policy focus in the short to medium term.
Credit: Nairametrics (Text Excluding Headline)
