The foreign exchange (FX) market kicked off Wednesday with the Nigerian naira experiencing a depreciation of 0.38 percent against the US dollar at the parallel market.
As the morning trading commenced, the dollar was trading at N778, the same rate at which it closed on Tuesday. However, this rate was lower than the intraday trading rate of N775 witnessed on the same day.
Traders in the market expressed uncertainty, emphasizing that the current rate might fluctuate later in the day depending on the demand pressure. Dollar demand pressure was palpable at the Investors and Exporters (I&E) forex window on Tuesday, with eager buyers and sellers bidding as high as N820/$ and as low as N700/$.
The volume of dollar transactions in the market saw a decline of 16.71 percent, amounting to $73.86 million on Tuesday compared to the $88.68 million recorded on Monday. As a result, the naira experienced a depreciation of 3.50 percent, with the dollar quoted at N768.44 on Tuesday, whereas it was quoted at N741.50 on Monday at the official FX market, according to data from the FMDQ.
These recent developments in the FX market can be attributed to the comprehensive reform initiated in mid-June, which aimed to address three critical distortions.
These distortions included the absence of a price discovery mechanism, the existence of multiple FX windows, and institutional weaknesses like a lack of transparency and predictability, as stated in a report by the World Bank.
The Central Bank of Nigeria (CBN) took significant steps toward reform by abolishing the segmentation of the FX market across multiple windows and consolidating them into the Investors & Exporters window, effective from June 14.
This move allowed the naira to trade freely by reintroducing the willing buyer, willing seller mechanism at the I&E window, aligning the exchange rate for government transactions closer to the Nigerian Autonomous Foreign Exchange Fixing (NAFEX) rate, enhancing transparency of orders, and eliminating ineffective schemes such as the RT-200 and Naira 4 Dollar Remittance programs.
The impact of these reforms was evident, as the naira experienced its largest single-day depreciation of 27 percent, plunging from N463 to N632 per US dollar.
The World Bank report highlights that to further enhance the efficiency of the FX market, it is crucial to remove FX restrictions, clearly communicate the operational aspects of the new FX regime, and implement a supportive monetary framework where the primary objective of price stability guides monetary policy actions.
As market participants navigate these changes, both buyers and sellers will closely monitor the FX market’s movements, anticipating fluctuations that may impact the exchange rate dynamics throughout the day.
