Earlier this week, the parallel market rate depreciated to N475/$1 – its best level in 12 weeks – as a result of the inability of the official market to satisfy the huge demand backlog by manufacturers, traders and foreign investors seeking to repatriate capital.
Since September, the CBN has allotted over $1.0bn to BDCs in a bid to inject more liquidity and ease demand pressures, according to media sources. However, the volatility in the markets remained unabated.
The recent pressure on FX rates is attributable to a number of factors:
First, legitimate FX demand by manufacturers whose obligation to their foreign suppliers continues to increase.
Additionally, elevated demand for dollars appears driven by festive season-related importation in anticipation of yuletide sales as well as year-end travel linked to demand.
Finally, speculation by market participants who expect the Naira to depreciate even further continues to weigh on the parallel rate.
In our view, the current foreign exchange pressure is likely to be sustained through the end of the year as demand for festivities-related imports rises through December.
We note that the CBN’s restrictive policies, targeted at reducing demand, may end up hurting businesses and forcing even more demand pressure on the parallel market.
This may further widen the spread between official and parallel market rates. As such, any moderation in the parallel market rates will depend on a fundamental change in the factors currently affecting supply: low oil prices and the dearth of foreign capital inflows into the country.