May 19, 2023/CSL Research
The Naira fell to N465.13/US$ (the biggest drop since 29 December 2023) at the I&E window this week as the country continues to battle FX shortages amidst growing demand. The Naira has fallen to low levels in the past weeks, amidst the ongoing dollar scarcity. Nigeria is experiencing one of its worst FX crises in history due to increasing demand for FX amidst low supply.
Fundamental market pressures are clearly depreciatory and are likely to remain so over the remainder of the year amid declining investment inflows and fiscal expansion. However, the rate is clearly still being managed by the CBN. As such, the rate for the rest of the year depends more on the CBN’s willingness and ability to maintain it at its current level than on fundamental or valuation pressures.
Despite the relatively high oil prices, Nigeria has failed to benefit from it, due to limited production and, the maintenance of a subsidy regime. The country has also failed to increase its non-oil exports despite several projects introduced by the CBN such as the FT 200 FX programme. Crude oil, with a relatively low production capacity, continues to dominate the export earnings. The country has also failed to significantly increase its non-oil exports.
These, coupled with the almost non-existent FPI inflows, which were a major source of dollars for the economy previously, makes the situation dire. The high number of people relocating to the UK and Canada taking advantage of current visa laws has increased the demand for invisibles in the form of school fees and upkeep. The only respite remains remittances.
CBN is unlikely to ramp up intervention levels at the I&E window in the near term as inflows remain tepid and FX reserves remain depressed. We however expect that the CBN will xmaintain its current monthly intervention in the FX market. Meanwhile, the parallel market premium of c.63% continues to fuel arbitrage opportunities while FX rationing at the IEW has magnified the demand pressure at the parallel market. Our prognosis is for the premium to
remain widened, as the CBN is yet to resume FX sale to the BDCs. Beyond this, corporates and individuals who import items restricted by the CBN will continue to source FX from the black market. We maintain our view that the Naira could devalue to N510.00 at the I&E window by year end.