Naira Gains At NAFEX Window Despite 19.8% Drop In Dollar Supply

On February 1, 2021, the exchange rate between the naira and the dollar appreciated closing at N394/$1 at the NAFEX (I&E Window) where forex is traded officially.

On the flip side, the exchange rate at the black market where forex is traded unofficially remained stable at N480/$1. The exchange rate at the parallel market closed at N480/$1 on the previous trading day of January 29, 2021.

This is as dollar supply dropped by 19.8%

Why Naira Is Appreciating

The appreciation of the local currency can be attributed to moderation in dollar demand despite tight liquidity in the foreign exchange market.

Manufacturers in Nigeria in a report, have listed difficulty in having access to foreign exchange to pay for their imports as the biggest challenge they face.

The improvement in the country’s external reserve since the beginning of the year due to an increase in crude oil prices has increased CBN’s capacity to intervene in the foreign exchange market.

The exchange rate disparity between the parallel market and the official market is about N86, representing a 21.8% devaluation differential.

To streamline forex supply and ensure there is enough to meet rising demand, the CBN moved to ensure strict monetary control of the forex market threatening to expel exporters who refuse to remit foreign exchange proceeds in the NAFEX market. It also warned against paying diaspora remittances in naira.

The CBN may have also confirmed the forex pressures businesses are facing in its monetary policy communique of January 26, 2020, when it cited it as a reason for the weak purchasing managers index.

“This weak performance was attributed to the resurgence of the pandemic, foreign exchange pressures, increased costs of production, a general increase in prices and decline in economic activities.”