The Naira has entered a new phase of depreciation, closing at N1,740 to the dollar in the parallel market over the weekend, significantly reversing its earlier gains. This dramatic shift raises concerns about the currency’s stability as pressures mount ahead of potential interventions by the Central Bank of Nigeria (CBN).

In contrast to the parallel market’s decline, the Naira showed slight appreciation in the Nigerian Autonomous Foreign Exchange Market (NAFEM), where the indicative exchange rate fell to N1,600 per dollar, down from N1,601.2 the previous Thursday. This minor gain reflects ongoing speculation that the CBN may intervene soon to stabilize the currency amid rising exchange rate pressures.

Data from the Financial Markets Dealers Quotations (FMDQ) highlights a stark comparison between the current situation and earlier this year. Following a significant appreciation in March, where the Naira improved from a peak of N1,820 in February to N1,240 by mid-April, the currency has since faced relentless depreciation. By the end of the third quarter, the Naira had depreciated by 70.5% in the parallel market, averaging N1,705 per dollar compared to N1,000 a year prior.

Year-to-date, the Naira has depreciated by 16.7% from N1,490 in January. The official segment has seen an even steeper decline, with the Naira recording a 104% year-on-year depreciation to N1,540.78 per dollar in September, compared to N755.27 in the same month last year. However, the Naira’s decline in the NAFEM market was comparatively mild, at 9.9%, signaling fluctuations in currency stability.

Analysts attribute the Naira’s continued depreciation to persistent supply shortages. Monetary and fiscal authorities, however, appear to differ in their assessments of the issue. CBN Governor Yemi Cardoso, addressing the Monetary Policy Committee (MPC) recently, noted a correlation between disbursements from the Federation Accounts Allocation Committee (FAAC) and foreign exchange demand pressures. He indicated that the CBN would closely monitor future allocations to mitigate their effects on the exchange rate.

Conversely, Finance Minister Wale Edun, speaking at the World Bank Group annual meetings in Washington, attributed the foreign exchange market’s troubles to inadequate supply rather than demand pressures. He emphasized the need for Nigeria to enhance its oil production to alleviate foreign exchange supply issues.

Forex dealers are increasingly reporting a shortage of supply amidst rising demand, causing the exchange rate to approach the CBN’s “fear index.” This situation suggests that the central bank may need to implement emergency measures, potentially increasing supply interventions to enhance liquidity in the forex market.

Since August 8, the CBN has refrained from conducting retail Dutch foreign exchange auctions, a sign of its cautious approach amid limited forex resources. Some dealers expect the central bank’s upcoming intervention to coincide with a test run of its new Automated FX Trading model, set to launch in December. This new system aims to improve market transparency and efficiency, potentially stabilizing the Naira.

With the current trajectory, the Naira is positioned to rank among the worst-performing currencies globally for 2024. After a period of sharp appreciation earlier this year, its renewed depreciation has drawn critical attention from institutions like the World Bank, which recently categorized the Naira as one of the poorest performers in sub-Saharan Africa.

Forex dealers have noted that when major buyers are unable to procure dollars from official channels, they turn to the parallel market, further exacerbating the scarcity of dollars and pushing the exchange rate upward. Mr. Liasu Moshood, a trader in the black market, pointed to the increasing demand from importers struggling to access official forex markets.

He stated, “The depreciation of the Naira in the market is due to the rush for dollars by importers who don’t have access to the official foreign exchange market. There is less dollar supply everywhere… These importers are sourcing large amounts of dollars from our market because those Bureau De Changes cannot meet their demands. Even the banks.”

Another trader, Mr. Idris Daud, projected the dollar could close the month at N1,750, and the year at N1,800 due to ongoing demand pressures linked to festive season imports. “The demand pressure now is high as more organizations are trying to import goods for the festive season… There is also less inflow of foreign exchange, and we end up with little supply,” he explained.

As the situation develops, the Naira’s fate hangs in the balance, contingent on potential interventions by the CBN and broader economic trends.