Nigerian Forex rate gradually recovers in 2022 after prolonged inflation

By: Damian Okonkwo

The Nigerian forex exchange rate which skyrocketed excessively reaching its highest in December last year, seem to be showing some signs of recovery since the beginning of the year 2022. The rapid acceleration was no doubt caused by the CBN‘s restrictions on Bureau de Change involvement in the exchange market. Thus, the apex bank during a monetary policy briefing in July 2021 had banned the sales of Forex to BDC operators, while also putting a stop to the licensing of new BDC operations in the country. And this in no small way accounted for the steady increase in inflation rate witnessed against the naira for the rest of 2021 since a prolonged scarcity of dollar emerged in the forex market following the news. Against this backdrop, Nigeria’s annual inflation attained its apex at 15.63% in December, marking a historical record of eight straight months of decline. The high inflation rate seen in December was similarly ignited by the hiking in prices of food due to the festive season.

The decision to checkmate the activities of the BDCs came after the body was accused of profiteering whereas banks are expected to make returns. Hence, the CBN had directed the banks to set up front desk officers and systems to ensure FX was available to the eligible buyers. The apex bank, as well, set up a desk to receive complaints from end-users. Thus the high number of BDCs, which are estimated at over 4,900 made effective monitoring by the CBN very difficult. On the other hand, the banks are fewer and have an existing relationship with the apex bank making it very easy for the CBN to control and monitor their FX activities.

In resolving to replace BDCs, the apex bank believed it could leverage its regulatory framework to secure compliance. Henceforth, unlike the case when the BDCs were in charge of foreign exchange, anyone going to buy FX for personal and business travel allowance (P/BTA) is expected to provide the documents required by the CBN to his bank who have been assigned the function presently as the custodians of foreign exchange.

Comparing the records available, it was observed that the exchange rate between the naira and the US dollar dropped significantly by 6.03% in the year 2021 to close at N435/$1 as of the end of trading activities on Friday, compared to N410.25 to a dollar recorded in the corresponding date of last year. At the parallel market, which is a more volatile market, naira crashed against the US dollar to close at N565/$1 on the 31st of December 2021 as against N460/$1, which was recorded at the end of the previous year. The price difference between the official and the black market rose to N140.74, and this was caused by the surging demand for scarce forex with the elimination of BDC.

Naira depreciated significantly all through the year 2021 despite the concerted effort of the apex bank to manage the exchange by intervening in the Investors and Exporters (I&E) window, which has seen the volume of traded forex at the official market witness significant increase compared to the previous years.

Nevertheless, the year 2022 seems to be taking off on a moderate dimension with the exchange rate gradually recovering from the highs of last year exchanging today at ₦ 416.88 per dollar. However, the case is quite different at the black market where dealers are buying a dollar for N565 and selling at N570 according to insider confirmations. This no doubt goes contrary to the CBN directives.

According to the report by David Adonri, an investment expert, told news agents that: “The market has recovered from the shock that follows the restriction of BDCs. The price seems to have attained equilibrium at N550/$. If you also look at the foreign exchange reserve, it has been stable, which means the monetary policy has more room to play in its intervention in the market,”

Similarly some political analysts believe the exchange rate could tumble again to a higher rate ahead of the smoldering political crisis for the presidential election next year to take place towards the middle of 2023. Until then, we hope that the current stability in the FX market would remain sustainable.

Nonetheless, despite the hoarding and panic buying which had seized the FX market today, raising the level of illiquidity. The value of naira seems to be stabilizing since January 2022.

The Central Bank of Nigeria (CBN) and some other financial analysts have described the panic as transitory, pointing out that the currency traders would run out of business when the new retail transaction model, which makes the deposit money banks (DMBs) the sole sale outlets, was perfected.

Above all the CBN had also insisted that the black market rates could not be taken for the true price of the local currency, as the segment was not recognised as the FX exchange body within the country.