Naira plunges to N1,400/$ at official market
The naira on Tuesday plunged to a record low against the dollar following a revision of the methodology used to set its exchange rate. This situation marks the second devaluation of the currency in seven months.
The naira depreciated by 31% to 1,413 to a dollar on Monday in the NAFEX fixing loop, the official foreign exchange window, according to data published by FMDQ, which calculates the exchange rate.
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The Bloomberg, in its Roundup yesterday, described the development as “devaluation”.
NAFEX – The Nigerian Autonomous Foreign Exchange Fixing is the reference rate for Spot FX operations in the Autonomous FX Market, which comprises recognized FX trading segments, including but not limited to the Inter-bank market.
Reports show that the currency sank following strong demand on the official market, exceeding N1,455 quoted on the parallel market.
The latest move came after the Central Bank of Nigeria (CBN) accused traders of manipulating the exchange rate by under-reporting transaction rates.
That brings the naira closer to its parallel-market rate of N1,468, and follows a devaluation of almost 30% in June last year, as the CBN liberalised the currency regime in an attempt to attract inflows and improve liquidity.
On Tuesday, the CBN said it had cleared all verified dollar backlogs owed to foreign airlines operating in the country, after paying out an additional $64 million.
The International Air Transport Association (IATA) said that while it welcomed the payment, airlines are still owed about $700 million.
“This is exacerbated by the devaluation of the Nigerian naira, which has dropped significantly against the US Dollar,” it said in a statement.
“Airlines should not be unfairly penalized by the lower exchange rate”, it said.
Why the new adjustment
The Lagos-based FMDQ said in a notice to financial market operators that the change to the pricing methodology “aims to address recent fluctuations and challenges encountered in the Nigerian Foreign Exchange.”
It added that “The measures will ensure rates accurately reflect market conditions while upholding price formation and transparency”.
No official comment from the apex bank in relation to the latest development.
“The NAFEX fixing and closing rates were weighed down by trades going through at off-market levels”, said Samir Gadio, head of AfAfrica Strategy at Standard Chartered Plc.
“What is clear at this point is that these off-market trades are not factored in anymore, hence the jump in NAFEX”, he added.
While the depreciation has been “very significant,” dollar supply from the central bank will need to improve for the naira to stabilize or even strengthen, Gadio said.
Currency inflows from portfolio investors would follow, further supporting the naira, once short-term interest rates rise significantly, he said.
In a circular published Monday, the CBN said it had become aware of traders reporting “inaccurate and misleading information,” including under-reporting of transaction pricing, which affected the exchange rate.
“Deliberate attempts to create price distortions by reporting false transaction details amounts to market manipulation which will not be tolerated and will henceforth face sanctions,” the central bank said.
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