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Understanding the Current Naira's Appreciation Against The Dollar And Its Implications

  • Published in Business

The simple reasons why Naira has appreciated against US Dollar in the past few days are not far fetched. The main reason is the FG's increased earnings of dollars from the sale of increased volume of crude oil following its successful mediation efforts in the Nigeria's delta region.


Economically speaking, when the supply of dollar to Nigeria increases, there will be a corresponding drop in the rate at which dollar is purchased with Naira.

Therefore, fewer amount of Naira would be used to buy $1 against what it was some weeks ago.

Also, some transactions eligible for banks' or CBN dollar allocation like travel allowances, school fees and letters of credit which for sometime now had to rely on the parallel market for supply are now being serviced at the official window through the banks.

Economically speaking, if demand of dollars from the parallel market drops because customers now have a cheaper supply in banks, then the price at which the dollar is sold at the parallel market will also drop.

Most importantly, the Exchange Rate in the parallel market may remain low because of lowering FX demands caused by a general reduction of imports in the country.

Most importers of luxury items like new cars, jewelry, clothing, cosmetics etc. have slowed down due to high customs tariffs and inflation that make their selling prices not affordable to customers.

It's only when sales are made that stocks are replenished through imports.

There is also a reduced quantity of the import of raw material inputs by manufacturers for the following reasons:

1. Inability to get enough FX to import needed raw materials on a sustainable basis.

2. The closure of factories due to poor sales as the prices of their products are way above the affordable limits of the customers who are either not paid salaries or have been sacked.

It is dangerous to regard the current drop in FX rates in the parallel market as a manifestation of improved economic activities as illiterate politicians would soon start singing. It is not.

Even though, the FX rates reduction would reduce headline inflation, a lot more needs to be done to keep the economy going.

Nobody should think that the sharp drop in FX rate is as a result of the success of the government's import substitution policy. We are yet to get there. It will surely happen but not yet.

BUSINESS ADVISORY
CBN has vowed to push down the exchange rate in the parallel market until it is very close to the official CBN rate. It calls it "rates convergence".

The CBN can only achieve this if the peace in the Niger Delta persists and if the price of crude oil in the international market does not drop.

Already, Devil has started pushing down the oil price below $50 per barrel. It portends reduced sales receipt to the federation.

If the drop in crude oil price continues, the CBN will not be able to supply enough FX to the market as it may patriotically wish to and its avowed "rates convergence" push would be delayed.

A smart user of FX should watch the following:
a) Nigeria's Crude Production Volume Levels.

b) The Price of Crude Oil in The International Market.

c) The Nigeria's Foreign Reserves Level.

MY PREDICTION

Having grown the Nigeria's Foreign Reserves to +$31 billion from less than $23 billion levels, CBN shall and can actually make good its intention to pump USD to the market to achieve rates convergence.

It is reasonable to project that the USD rate at the parallel market shall keep falling until it gets close to CBN official rate of around N305.5/$.

Note that the nearest the parallel market rate has ever got to the official rate is a difference of between N1 and N2 per dollar. But it was for a short while.

I expect the rate to race down towards N310/$-N320/$ in next few days if the price of crude oil and the production levels remain within tolerable limits.

If I were an importer of goods who source FX from the parallel market, I would rather wait for few days or weeks and start buying FX when the rate becomes stable.

With banks selling BTA, PTA and other invisibles at N375/$ someone may conclude that official rates range from N305.5/$ -N375/$.

Some experts have started predicting that the exchange rates may settle around N375/$ and N400/$.

The rates may even go lower if Nigeria increases FX earnings from other sectors of the economy other than from oil.

Wisdom tells us that goods bought at higher FX rate would be more expensive than that imported with lower FX rate.

Any misbuying of FX to import common goods could retire a promising business person.

Please note that the Naira has not appreciated at CBN's official exchange rate.

Bankers and other patriotic citizens are advised to regard the Parallel Market as illegal.

Like in other things we do in our national life, when an illegal activity is being enjoyed by both the saints and the sinners, they appear normal and official.

People who hold their funds in hard currency could feel anxious for now but they should be assured that their USD has not lost much value, if at all in United States of America.

If you must convert your FX to Naira, be mindful of the high Naira inflation rate.

You are advised to apply the local currency in acquisition of revenue yielding assets to cushion a potential diminution in value.

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