The parallel market will remain a main source of foreign currency despite an expected marginal improvement in FOREX access through official channels
Multinationals should ensure their assumptions for 2024 are in line with the latest devaluation and the impact this will have on pricing and planning. Currency depreciation will sustain inflationary pressures in 2024, leading to continued price sensitivity for consumers and diminished purchasing power. Consumer-facing firms should be flexible in responding to changes in consumer demand and ensure their local teams are collecting insightful information on the latest consumer trends. B2B firms are advised to offer their customers flexible payment plans to minimize the effect of possible payment delays. Multinationals should prioritize working with financially resilient local partners with stable access to FOREX, which will help ease the effect of an uncertain exchange rate environment. Multinationals are also advised to schedule more frequent conversations with their local partners or distributors to align on cost assumptions, pricing updates, and exchange rate movements.
Overview
- On January 30, 2024, the naira dropped to a record low of NGN 1,482:USD according to data reported by FMDQ, a local exchange bureau that reports the daily NAFEM spot rates. Since then, the value of the naira per USD has consistently hovered above the NGN 1,400 mark. The intra-day high reached NGN 1,520:USD on February 6, 2024, which closed the gap between the official and parallel rate.
- This is the second devaluation in the span of six months, and coincided with the Central Bank of Nigeria (CBN) introducing sweeping reforms to the foreign exchange market. These include obliging banks operating in Nigeria to reduce their foreign currency exposure, whereas International Money Transfer Operators (IMTOs) are now obliged to pay any inbound transfers in local currency at the prevailing official exchange rate and are not allowed to handle any outbound transfer requests.
- Central Bank Governor Olayemi Cardoso announced that FOREX obligations totaling USD 2.4 billion will not be settled following an audit that found irregularities tied to these obligations. This brings the remaining unsettled FOREX backlog at the CBN down to an estimated USD 2 billion.
- Local sources reported difficulties accessing FOREX at the parallel market, with some exchange bureaus closing down between February 2 and 3, 2024 following the devaluation of the currency at the official rate and the uncertainty caused by the introduction of the above-mentioned regulatory changes.
Our View
The CBN will temporarily succeed in managing the naira through a de-facto free float following the devaluation and reforms to the foreign exchange market. FOREX access through official channels will marginally improve over the next three months as the CBN works towards clearing its backlog and some market participants resort to the official market to sell their holdings of USD. In the next three to six months, the naira will fluctuate between NGN 1,400:USD to 1,600:USD at the official rate. However, the parallel market will remain a source of foreign currency for a significant portion of market participants; companies and individuals in Nigeria will be reluctant to instantly switch their sources of foreign currency given the history of difficulties accessing FOREX through official channels. The outlook for the value of the naira and FOREX access in the coming year depends on a number of critical factors that will determine whether a fully liberalized exchange rate is the new status quo or if the CBN will retain control over the value of the currency.
Signposts to Monitor:
- Parallel market divergence/convergence: The parallel rate, averaging around NGN 1,440:USD, is currently lower than the intra-day high of NGN 1,520:USD (reported by FMDQ) and almost on par with the average daily exchange rate reported by the CBN. A renewed divergence between the parallel and official rates in the next three to six months indicates the return of FOREX shortages through official channels and the absence of an actual free float.
- CBN monetary policy committee decision on interest rates on February 26–27: A substantial interest rate rise of at least 500 to 600 basis points is required to send a signal to the markets that the CBN is intent on implementing traditional monetary policy that prioritizes exchange rate and price stability. A reluctance to raise interest rates would undermine market confidence in the naira and would further fuel the reliance on the parallel market as a source of US dollars.
- Fuel price changes: A further reduction in the magnitude of fuel subsidies is required to minimize FOREX demand through official channels. The current price of gasoline in dollar terms is 0.46 cents per liter (assuming an exchange rate of NGN 1,400:USD.) Failure to introduce price hikes or completely remove fuel subsidies would result in a continued drainage of FOREX reserves, ultimately leading to a weaker naira and difficulty in accessing FOREX through official channels.
- Reforms to crude oil revenue management: The Domestic Crude Allocation system, which dates back to the 1990s, has become ineffective in ensuring that Nigeria capitalizes on its oil production for FOREX inflows. A major overhaul to the management of crude oil production and its commercialization (i.e., an end to crude for refined product swaps and introducing more stringent reporting measures on the Nigerian National Petroleum Company) is required to guarantee a consistent inflow of FOREX. This, in turn, would support Nigeria’s current account balance and ultimately the currency’s value in the long term (oil exports account for approximately 70–80% of total exports in Nigeria).
- Reaction by foreign investors: The willingness—or lack thereof—of foreign investors to announce major investments in Nigeria will indicate to what extent the CBN has succeeded in its new reform drive. Monitor this space for the next three to six months to assess foreign investor confidence in their ability to repatriate profits through official channels.
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