New data reveal forex supply shortage at official window as exchange rates plunged in 2023

The latest data from the Central Bank of Nigeria (CBN) reveals the extent of the dollar supply shortage as Nigerians grapple with one of the worst currency depreciations in recent years.

The data, published in the CBN’s annual bulletin, show that only $9.8 billion was supplied by the central bank through the official Investors’ & Exporters’ (I&E) window for the entirety of 2023.

This figure is the lowest dollar supply recorded since 2017, a year when Nigeria faced a similar foreign currency crisis.

In 2017, the central bank supplied just $9.3 billion to the official segments of the market as dollar inflows dried up following a decrease in crude oil proceeds. Indeed, the year before, in 2016, saw the lowest supply in over a decade at only $6.3 billion.

Dollar Shortages

An analysis of the 2023 data shows that out of the $9.8 billion sold by the apex bank, $6.1 billion—or 62% of the supply—was provided in the first five months of the year, under the Buhari administration with Godwin Emefiele as CBN Governor.

• However, the Tinubu administration introduced the unification of the naira, setting the tone for a new paradigm in how Nigeria will manage its forex policies going forward.
• By June 15, 2023, the first wave of official exchange rate depreciation took place, with the naira falling to N702/$1 from N471/$1.
• Subsequently, a wave of currency depreciation hit both the official and parallel markets as the supply in the official window dwindled.
• CBN data reveals that between June and October 2023, only $2.4 billion flowed into the official market from CBN sources. The actual supply crunch occurred between August and October, with only $605.45 million supplied to the official market. Notably, October recorded zero inflows.

The significant drop in forex supplies perhaps explains the reason for the exchange rate volatility in the second half of the year, which resulted in massive depreciations and a wide disparity between the official and parallel markets.

For instance, according to Nairametrics data, as of August 1, 2023, the exchange rate in the official window was quoted at N789/$1, while the parallel market was at N872/$1.

By the end of October 2023, the parallel market had surpassed the psychological thousand-naira mark, trading at N1,150, while the official window had also hit an all-time low of N993.8/$1 (on October 30th, 2023).

As the year drew to a close, another $1.27 billion and $61.7 million were supplied in November and December, respectively.

The exchange rate in both the official and parallel markets closed December at N907/$1 and N1,215/$1, respectively, ending a tumultuous year for the local currency.

The importance of forex liquidity

Nigeria currently practices a market-driven exchange rate policy where the forces of demand and supply determine the exchange rate.

• This system, which the central bank designates as a managed float, allows market forces to dictate the exchange rate while still depending significantly on the central bank’s role in the inflow of forex into the official market.
• Central Bank officials indicate that over $3 billion in inflows entered the economy in the last few weeks, as foreign portfolio investors snapped up treasury bills and Open Market Operation (OMO) bills.
• However, when examining data from prior years that correspond with a strong naira, it seems Nigeria will require a substantial amount of forex inflow, particularly in the official market.

What the CBN is doing

In response to the forex challenges Nigeria has faced, the Central Bank Governor Olayemi Cardoso provided an overview of the strategies and measures the CBN is implementing.

• In recent commentary, as reported by Nairametrics, Governor Cardoso stressed that the Central Bank has moved from a reactive “firefighting” stance to a strategic planning phase.
• This change in approach comes after half a year of tackling significant economic challenges, such as inflation and volatility in the foreign exchange market.

Governor Cardoso has highlighted a focus on creating an efficient, transparent FX market to foster ease of doing business in Nigeria, which is expected to enhance financial and economic inclusion, particularly for small businesses and households.

• He revealed the CBN is also prioritizing liquidity in the forex market by unifying the naira exchange rate and removing currency trading restrictions to promote a market-driven rate through price discovery.
• The central bank also stated that it has consolidated all FX transaction windows into the NAFEM platform, settled a significant portion of outstanding FX obligations, and enhanced monitoring of FX market activities to ensure transparency and price discovery.
• Other measures such as lifting exchange rate caps for IMTOs and transferring NNPC accounts to the CBN are part of efforts to streamline capital flows and mitigate currency risks.
• Governor Cardoso also noted the influx of foreign portfolio investment as a positive sign and aims to double diaspora remittances as part of the CBN’s policy focus in the short to medium term.