November 15, 2022/United Capital Research

In the aftermath of the CBN’s announcement on the redesign of the N200, N500, and N1,000 notes to take control of the volume of currency in circulation, the parallel market segment was met with extended pressure. Based on initial reaction, it was suspected that huge stash of Naira would opt to convert their Naira to foreign currency in bid to avoid depositing into bank accounts which could trigger unwanted attention. Unsurprisingly, this thought sparked increased FX speculation within the Nigerian economy as members of the public attempted to trade on this expectation. As a result, the Naira depreciated significantly touching N900/$ level.

In response, media reports stated the Economic and Financial Crimes Commission (EFCC) in collaboration with the Central Bank of Nigeria (CBN) began to tackle the issue by revoking Bureau De Change (BDC) licenses while raiding and arresting some of the big players within the space. This has consequently halted the free fall of the Naira against the Dollar. Contrary to overall market speculations that the most recent wave of pressure on the Naira would see the currency to the N1,000/$ mark, the Naira halted its free-fall after testing the N900/$ resistance last week. In the same week, the dynamics of the currency market altered in favour of the Naira, as it gained over 25.0% to trade at an average of N680.0/$ as of the close of trading activities on Friday, November 11, 2022. That said, we note that dollar exchange rate has varied significantly ranging from N680.0/$ to N750.0/$ depending on the dealer.

We commend the CBN’s intervention to curb the recent wave of pressure on the Nigerian Naira. However, we believe that the appreciation of the Naira in the parallel market will be short-lived, given that FX pressures will return as electioneering activities continue to unfold. In the medium to long term, the country’s restricted access to the international capital markets, and declining Foreign Portfolio Investments (FPIs), will remain significant downsides for a stronger Naira vs the Dollar. That said, abating the country’s persistent FX liquidity crunch relies heavily on improving the country’s ability to offer valuable goods & services to the international market which increases FX earning capacity.