November 3, 2022/CSL Research
Following the Central Bank governor’s announcement of plans to redesign, produce, and circulate new series of banknotes at N200, N500, and N1,000 levels, the exchange rate at the parallel market has fallen to record lows, further widening the already huge margin between the parallel market rates and the official rates.
We had noted in our report that a negative fallout of CBN’s redesign announcement will be the further depreciation of the Naira and a hike in asset prices as individuals and organisations, trying to avoid taking their cash to the bank, will likely buy foreign currency and other assets at any possible cost (See CSL Nigerian Daily 27 October 2022_Currency).
True to our prediction, the Naira at the parallel market has depreciated by c.16% since the announcement was made on Wednesday last week as demand for FX has surged. Many of the black-market traders have run short of supply and many believe the exchange rate will depreciate to as low as N1,000/US$ in a very short time if nothing is done to manage the situation.
According to the CBN Governor, the decision to print new notes is in response to a few challenges being faced by the apex bank as regards currency management. Such challenges include.
Hoarding of banknotes, resulting in over 80% of currency in circulation being outside the commercial banking system; worsening shortage of clean and fit banknotes; and increasing ease and risk of counterfeiting evidenced by several security reports. Though, we had pointed out many expected positive outcomes from the redesign plan if properly implemented, the free fall of the Naira which we have seen since the announcement, makes us believe the harm that will arise from the implementation of the redesign plan will likely mask any anticipated gains and put the country in a worse economic situation.
The Naira has fallen to low levels in the past weeks, amidst the ongoing dollar scarcity. Nigeria is experiencing one of its worst FX crises in history due to increasing demand for FX amidst low supply. Fundamental market pressures are clearly turning depreciatory and are likely to remain so over the remainder of the year amid declining investment inflows and fiscal expansion. The CBN has been gradually allowing a devaluation of the Naira at all the available windows. At the Investors and Exporters (I&E) window, the dollar was quoted at N446/US$ at market close on Tuesday (FMDQ). Recall that previously, CBN capped sales at the I&E window at about N420/US$. Sale of FX for Invisibles is now at about N442/US$.
While it is unclear what the CBN can do to stem the free fall of the Naira that is being observed, we note that the already bad macroeconomic situation stands to worsen significantly if nothing is done. The recent flood incidents across the nation have already begun to cause an increase in food prices amidst the approach of the Christmas season which is normally characterized by increase in prices. Inflation numbers are set to deteriorate significantly if the current rate of devaluation persists. Added to that, the current FX scarcity
will worsen business conditions with the attendant effect on GDP growth.
