Dollar scarcity hits as naira crashes despite CBN’s policy decision

• According to data compiled by Bloomberg from FMDQ, the value of the Nigerian naira continued to decline.
• This is as the local currency struggles due to a dearth of US dollars and a drop in foreign capital inflows into the country
• According to Bloomberg, the poor dollar inflows have kept pressure on the local currency

Legit.ng journalist Zainab Iwayemi has over 3-year-experience covering the Economy, Technology, and Capital Market.

Data collated by Bloomberg from FMDQ has shown that the value of the Nigerian naira resumed its downward trend on Wednesday, September 25, hitting a new low of N1,677 per dollar at the official close.

Due to a dearth of US dollars and a drop in foreign capital inflows into the country, the local currency is still struggling. Photo Credit: CBN
Source: UGC

This is an 8.2% decrease from the end of last week, as the local currency continues to struggle with a lack of US dollars and declining foreign capital inflows into the nation.

Recall that the Central Bank of Nigeria raised interest rates by 50 basis points on Tuesday, bringing the benchmark rate to 27.25 percent, but the naira did not appreciate.

The CBN raised rates as part of its efforts to fight inflation, which is close to reaching a three-decade high. However, Bloomberg said that the local currency has continued to be under pressure from weak dollar inflows.

“At one point, we saw significant foreign portfolio investment flows into the market, but that has slowed down considerably.“If the economy can generate more dollars from both the oil and non-oil sectors, it will increase investor confidence and inflows, helping to stabilise the naira,” said Stanbic IBTC Bank Plc’s Muyiwa Oni.

Furthermore, years of underinvestment in the oil industry have made it difficult for Nigeria, the largest oil producer in Africa, to reach its OPEC oil output targets.

The majority of the nation's foreign exchange earnings come from the sale of crude oil, but billions are also spent on the importation of refined petroleum and the subsidisation of domestic fuel costs. The fuel subsidies cost the Nigerian government $10 billion in 2022 alone.

There is hope

According to Bloomberg, there is some hope, as the recently completed Dangote Refinery near Lagos has begun to produce gasoline, potentially reducing the demand for petroleum imports.

The central bank must frequently step in and sell dollars to the nation's almost 6,000 registered Bureau de Change operators due to the tight local dollar market, which is still present on Wednesday.

“Volatility has been a persistent issue with the naira, and this looks set to continue unless we see sustained inflows to support liquidity.“The hike in rates indicates that the central bank expects inflationary pressures to persist, which could further weaken the local currency,” said Ayodeji Dawodu of BancTrust Investment Bank Ltd.

CBN identifies forces behind naira's crash

Legit.ng reported that tthe Central Bank of Nigeria has hinted that the monthly disbursements from the Federation Account Allocation Committee (FAAC) to states are reasons for the poor performance of the Nigerian currency.

Yemi Cardoso stated this during the press briefing after the CBN's 297th Monetary Policy Committee (MPC) meeting.

According to the CBN governor, there is a correlation between the disbursements and the poor performance of the naira.

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Source: Legit.ng