Pressure mounts on Nigerian Naira due to increasing Dollar demand

Some conditions like 2019 election uncertainties, high services payment and many other conditions that resulted into capital outflows in the country are likely to subject Nigeria to pressure going next year.

Financial analyst at CSL Stockbroker limited & the financial derivative company limited (FDC) noted in two different report that capital repatriation by investors outside the country was expected to raise dollar demands.

The Naira trades comparatively stable at N362 per dollar to N362 per dollar on parallel market. Currency pressure are gathering momentum at the investors’ and Exporters’ foreign Exchange window. Now, transactions are made at this window at an average rate of N364 per dollar against N362 per dollars to N363 per dollar in past months.

However, the Central Bank of Nigeria has claimed that it possesses enough war chest to keep up with the Forex demands in the country.

According to the CSL, The periodic Currency crises experienced in Nigeria is majorly dependent on the inability of the policy maker to proffer solution to the macroeconomic situation that is called the impossible trinity.

It further stated that the impossible trinity is also known as Trilemma. The Trilemma postulates that it is not possible to have all a fixed foreign exchange, an independent monetary policy and a free movement of capital at the same time.

It further stated the foreign exchange market as well as the parallel market premium range in the range of 10 to 20% will return according to their thought. In view of this it was recommended that local fixed investor do not prolong the duration but should concentrate on the short-end of the curve.

It was shown that a free exchange rate was yet to be embraced in the country.  It added that the Central Bank of Nigeria has a considerable level of control on interest rate as at now. This discrepancy in policy has been in place since independence with its accompanying effects on the periodic currency crises of the nation. Nigeria runs a sizeable deficit of $5 to 6 billion on the services balance but, this is an offset by the excess of the trade account meaning that the country runs a current account surplus.

It is of the belief that the central bank of Nigeria will address the situation of the official exchange rate and will be prepared to see the parallel market widen. The demand for foreign exchange is likely to rise due to loser fiscal policy in the run-up to the election.

It was stated that the demand of foreign exchange is expected to rise remarkably above the CBN’s willingness to supply it. This will surely result into the broadening of the parallel market premium. This will be due to the fact that private sector who need to make service payment will have to compete for foreign exchange.

A research and financial advisory company, FDC anticipated that there will be an increase in the Forex demands in some months now as manufactures will start stock build-up for festive sales. Coupled with increased election spending, this could lead to exchange rate depreciation.  However, the Central bank of Nigeria has reiterated that it prefers the exchange rate stability to external reserves. On thus note, we expect the currency to remain balanced in 2018.

The report stated that due to the Forex demands pressure coming from festive and election period, the Nigerian external reserve depletion was expected to be sustained in the following months.





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