Naira exchange rate convergence worsens across FX market in 2022

Exchange rate convergence has worsened across the regulated and open market. At the year end, the gap between dollar spot rate at the investors and exporters window settled at about 70 per cent.

At Investors and Exporters foreign exchange market, naira was sold at N461.50 at the close of the trading session in 2022, translating to about 11% year on year depreciation from N416 in January, 2022.

In the parallel market, naira was sold at N740 with intermittent adjustment to N745. Though external reserves printed strong at $37 billion, the local currency exchange rate continued to worsen while the apex bank blocked dollars upstream from users.

For Nigerians, dollar payments for goods and services appears to become a forbidden economic activity as local banks announced an outright end to $20 monthly spends.

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In the investors and exporters FX market, Nigerian naira was sold at N416 at the beginning of 2022 amidst the central bank sustained multi-tiered exchange rates that follow foreign currencies rationing in a growth starved densely populated Africa’s largest economy with about $450 billion gross domestic product size.

For foreign money bags seeking to penetrate the local economy, FX policy that limits the ability to upstream dollars abroad was a ‘no-no’, by the middle of the year, MSCI index threatened to downgrade Nigeria’s index citing inability to get dollars out of the country.

Apart from the threat to the index, the International Monetary Fund and the World Bank advised the apex bank leadership to adopt a market clearing exchange rate to attract foreign investors.

Traders’ notes show that the Nigerian Autonomous Foreign Exchange Fixing (NAFEX) rate traded within the range of N435.0-452.0/$ but closed at N461.50 for the United States dollar.

In the forwards market, FX traded within the range of N452.0-472.9. In the 1-month contract, naira depreciated by -0.8%% last week to close at N468.9, and in the 3-month contract, naira depreciated by -0.9% to close at N475.2.

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In the retail secondary market intervention sales (SMIS) market, the FX spot rate remained unchanged at N445. With an open market rate of N740 to a greenback, the gap between the NAFEX and parallel market rate settled at 62.1%.

In the second half of 2022, naira lost 10%, from an exchange rate of N415 that was marinated at the Investors and Exporters FX window as monetary authority slowed on market interventions.

As a result of its fresh red line crossing, FX has widened and analysts have raised their devaluation frenzy louder, saying there is no indication that the local currency will recover.

Naira is stretched across the foreign exchange market while the galloping headline inflation rate continues to weaken purchasing power, reducing the real value of individual and corporate wallets.

Bank of America recently said the naira is 20% above its fair value in the official foreign exchange market with expectation that by the end of first quarter in 2023, the Central bank would have corrected the overvaluation.