The Central Bank of Nigeria (CBN) on December 31, 2021, adjusted the official foreign exchange rate on its website to N413.49k from N411.95k per dollar, a development, some analysts described as moving towards rate convergence in 2022.
Consequently, naira depreciated by 4.82 percent as the dollar was quoted at N435.00 on Friday, December 31, 2021, as against the last close of N415.00/$ on Wednesday, December 29, 2021, data from the FMDQ show.
In May 2021, Nigeria’s banking sector regulator devalued the naira to N411 per dollar from N379 after it adopted the Investors and Exporters (I&E) as official window.
The new exchange rate is 0.48 percent lower than the old rate of N411/$ and 0.81 percent weaker than the 2022 budget benchmark of N410.15k.
“This is a departure from the target exchange rate used for the 2022 Budget. Although the adjustment is marginal, it may signal a move by the CBN towards achieving exchange rates convergence in 2022,”Taiwo Oyedele, head of tax and corporate advisory services at PwC, said.
However, he said there should be complementary policy measures by both the monetary and fiscal authorities to attract foreign exchange into the country and thereby guarantee a stable exchange rate regime.
Ayod, head, retail investment, Chapel Hill Denham, said the Nigerian Autonomous Foreign Exchange Fixing (NAFEX) rate is managed float and determined by demand and supply as well as CBN intervention.
“We can’t say for sure this will be the new official rate until it maintains this level for a while. Any depreciation at the NAFEX window means more naira revenue for the government while it translates to higher cost of goods for Nigerians,” he said.
As a result of the drop in foreign exchange supply arising from low earnings from the sale of crude oil, the naira depreciated by 7.7 percent from N380/$ to 410/$ at the I & E window, Godwin Emefiele, governor of the CBN said.
Supply was also affected by the massive outflow of foreign portfolio investments from emerging and frontier markets including Nigeria in 2020.
He said a combination of these factors led to a marked drop in the country’s foreign reserves from nearly $36.7bn at the beginning of the crisis in March 2020, to a low of $32.9bn in June 2021. It is important to state that the volume of activities at the I&E window fell from nearly $250 – 300 million daily to less than $40 million in the first quarter of 2021.
As a result of our demand management policy, the naira has remained largely stable around N411/US$1 at the I&E window particularly since the discontinuation of FX allocation to Bureau De Change operators along with the convergence between the CBN and NAFEX rates,” Emefiele said in November 2021.
He said banks are now able to meet the demands of their customers seeking forex for SMEs, school fees, medical and personal travel allowance (PTAs), which has reduced the need of customers to rely on alternative providers of foreign exchange. The average daily FX turnover at the I&E window is now over $250million, up from $40 million in April 2020.