No Respite for the Naira as International Flights Resume

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Wednesday, September 09, 2020 / 12:02 PM / by FDC/ Header Image Credit: The Abuja Times

 

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International flights resumed operations on the 7th of September after a 5-month hiatus induced by COVID-19. The resumption stemmed the appreciation of the naira in the parallel market witnessed last week.

 

The short-lived rally was on the back of the CBN's announcement of the resumption in its weekly intervention to Bureau De Change operators (BDCs) from 7th September to enhance forex accessibility.

 

This ignited panic-selling as speculators anticipated a strengthening of the naira in the parallel market as a result of the increase in supply. The naira has since depreciated by 5.62% at the parallel market (N445/$) in just two days since the resumption of flights after strengthening to N420/$.

 

The CBN will now sell a total of $10,000 per BDC twice a week at N384/$. The $20,000/week allocation is about 73.3% lower than the previous $75,000/week allocation prior to the COVID19 lockdown. The impact of increased forex demand by airlines and passengers has outweighed the impact of increased supply on the market thus far and this has triggered further weakening on the parallel market.

 

In the coming weeks, barring increased forex inflows, we are likely to witness further naira weakening at the parallel market as the impact of the CBN's $20,000 weekly allocation to BDCs will be insufficient to match the increased forex demand for foreign travel. This is in addition to the uptick in foreign trade, which will put further pressure on the naira.

 

The naira could weaken further, back to N470-475/$, in the parallel market as forex receipts remain constrained by lower oil prices and production, amid delays in obtaining the $1.5bn in financial support from the World Bank. With a forex demand backlog mounting (estimated at over $5bn), the CBN could be looking to incentivize Foreign Portfolio Investors (FPIs) with higher yields, to help stem the steady decline in external reserves.

 

With the split of the OMO market in 2019 and lower OMO issuances so far in 2020, the CBN has achieved substantial cost savings in 2020 so there could be ample room to offer FPIs attractive yields to secure more forex inflows.

 

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