The $2.5 billion estimated foreign exchange demand backlog, rising dollar demand by manufacturers and retail end users are the main contributors to naira crisis, analysts have said.
The naira at the weekend, declined against the dollar, sliding to N698/$ from N690/$ at last week’s close amid elevated greenback demand.
In emailed report to investors, FX Trader, AZA Finance, global forex dealers, Ikenga Kalu, said he expects to see some naira buying activity this week, as the currency is expected to depreciate to N700/$ level, with speculators likely to take profits.
However, the naira exchanges at N425.55 to dollar at the official market, representing over N270 per dollar premium between the official and parallel markets.
Global Chief Economist at Renaissance Capital (RenCap), Charles Robertson, said Nigeria is in a difficult position and need to increase its dollar earnings and other revenue to support the economy.
He said Nigeria should hike taxes, raise more revenue as the country’s position is very tough that has not been seen in three decades.
Robertson, who is also RenCap’s Head Macro-strategy Unit, added: “Things are not looking pretty good for Nigeria and other emerging markets. Oil production in Nigeria has fallen so badly in the last few years and oil prices is also about falling more. We are going to see disinflationary policies coming because we are approaching recession,” he said.
Other analysts said the surging price of oil-Nigeria’s biggest export earner-has less effect in the parallel market since the Central Bank of Nigeria (CBN) cut off intervention in the unofficial market.
For them, electioneering for next year’s general elections will further increase foreign portfolio outflows and cause Foreign Portfolio Investors (FPIs) to remain on the sidelines.
In its Economic Report, Managing Director, Financial Derivatives Company Limited, Bismarck Rewane, said the forex market is segmented with multiple exchange rates at play.
It said the ongoing segmentation of the foreign exchange (forex) market has pushed between 55 and 60 per cent of forex transactions to the Investors and Exporters window (IEFX).
The most important rate, he said, is the IEFX where no less than 55 per cent of forex transactions are traded.
The IEFX window is the market trading segment for investors, exporters, and end-users that allows foreign exchange trades to be made at exchange rates based on prevailing market circumstances. Foreign investors are also allowed to trade in the window at a rate they think is appropriate provided they can find buyers for their funds.
According to Rewane, the CBN and most exporters and investors use the IEFX window as it serves as not only a source of price discovery but also a barometer for measuring potential and actual apex bank intervention in the market.
“Some of the exchange rate determinants are balance of payments, capital inflows and trade balance,” he said.