Banks, end users roundtrip FX from parallel market to official market
BDCs cite slow intervention from CBN
Naira appreciates as CBN expedites intervention, intensify enforcement
By Babajide Komolafe, Economy Editor Elizabeth Adegbesan
A surge in demandfor dollars in theparallel market driven by banks and end-users combined with slow forex disbursement to BDCs by the Central Bank of Nigeria, CBN, caused the Naira, last week, to fall by 23 per cent against the dollar, thus recording the worst weekly performance of the Naira since February.
Though the CBN came to the rescue of the Naira on Friday by intervening in the official Nigeria Foreign Exchange Market, NAFEM, hence appreciation of the Naira in the parallel market on Friday, currency dealers and analysts were uncertain about the fortunes of the Naira this week, citing pace and speed of CBN intervention as a determining factor.
After two months of steady appreciation to N1,140 on Friday April 19, from N1,1,820 per dollar on Wednesday March 21, the Naira, last week, depreciated for four consecutive days by N285 (25%) to N1,405 per dollar on Thursday April 25th.
Following the same trend in the official market, the Naira depreciated by N169.24 (9.9%) to N1,339.23 per dollar on Friday last week, April 26th, from N1,169.99 per dollar on Friday April 19.
FX rate differential
Financial Vanguard investigations revealed that the steady reversal in the fortunes of the Naira was triggered by a combination of factors, including sharp practices encouraged by the lower exchange rate in the parallel market.
Since the CBN resumed dollar sales to Bureaux De Change, BDCs, the parallel market exchange rate had been below the official market exchange rate. For example on Friday April 19, the parallel market rate at N1,120 per dollar was N64.5 lower than the official rate of N1,234.49 per dollar on that day.
To exploit this gap, banks besieged the parallel market, buy dollars at the cheaper rate and resell to their customers at the higher official exchange rate.
Following the steps of the banks, some forex end-users, also bought dollars in the parallel market, deposit them in their domiciliary account and sell to the banks at the higher official rate.
This practice according to currency dealers triggered huge demand for dollars in the parallel market and hence the 25 per cent depreciation of the Naira in four days last week.
Currency dealers also cited the slow pace of dollar disbursement to BDCs by the CBN. They noted that dollar disbursement to BDCs comes in trickles, with some BDCs not getting dollars for more than two weeks after naira payment to the apex bank.
Confirming this to Vanguard, President, Association of Bureaux De Change Operators of Nigeria, Dr. Aminu Gwadabe, said: The depreciation of the dollar was caused by two factors. The first was that people were buying from the open (parallel) market, deposit the dollars in their domiciliary accounts and sell in the interbank market and this is because the open (parallel) market rate is always lower than the interbank market rate.
The second factor is that we have seen the resurgence of Person-to-Person, P2P, where hedging, margin trading is taking place.
After nipping in the bud of Binance, other platforms sprang up. And you know transactions in those platforms are purely speculative. The likes of Binance can only be profitable at the expense of naira depreciation because it is a market that you buy low and sell higher.
Scant FX supply in official market
Investigation also revealed the situation was aggravated by the absence of CBN intervention in the official market for some weeks while inflow from Foreign Portfolios, FPIs also dwindled.
Explaining this development, Nnamdi Nwizu, Co Founder Comercio Partners, a Lagos based investment bank, said: Until yesterday (Friday) when they intervened, CBN had not intervened in the interbank market for weeks, and inflows were drying up.
Also forex demand that waited for Naira to strengthen (appreciate) seems to be filtering through now, both local and FPIs.
On the outlook for the Naira in the coming weeks, Nnamdi said: A lot depends on if the CBN continues to intervene in the market to ensure that they dont lose control of the market. And also if we start to see renewed FPI flows.
CBN intervenes
In a bid to arrest the depreciation of the Naira, CBN intervened in the official market on Friday. It also increased speed of dollar disbursement to the BDCs, while also stepping up enforcement activities with its monitoring task force which visited some BDCs and parallel market locations in Abuja and Kano on Friday.
As a result the Naira appreciated in the parallel market on Friday to N1300 per dollar from N1,405 per dollar on Thursday.
Confirming this development, Umoru Ahmed, a currency dealer based
