The Real Reasons Naira Appreciates After Suffering Worst US Dollar Depreciation in History
- The naira has gained more than 20% in value against the US dollar in recent days
- The rise in the value of the naira has drawn praise for the Central Bank of Nigeria, the EFCC
- However, information on why the naira rebounded dramatically after the worst depreciation in history against the US dollar has emerged.
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Financial analysts have provided deeper insight into why the Nigerian currency recently rallied massively against the US dollar, closing below 700 naira to the dollar last week.
The naira’s appreciation of more than 20% drew enthusiastic applause from Nigerians, who worried after it was named the worst performing currency in the world.
You may recall that the naira was devalued shortly after the Central Bank of Nigeria announced a plan to overhaul the Nigerian currency in order to mop up liquidity in the economy.
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The naira has fallen significantly against the dollar due to the CBN overhaul, reaching as high as 900 naira to the dollar on the black market as many influential politicians and Nigerians trade the naira for dollars.
The massive depreciation of the naira against the dollar prompted the Economic and Financial Crimes Commission to raid the offices of various Bureau de Change operators, blaming them for causing panic.
As fate would have it, the EFCC raid happened during a time when the dollar was having a bad week.
According to BusinessDay, the Nigerian currency, which was poised to trade at N1000 to the dollar, closed November 7-11, 2022, the trading week 26.24% stronger than it started on the parallel market.
On Friday, November 11, Naira was quoted at N705 on Friday in the black market, up from N890 a week earlier. Some traders in Ikotun, on the airport roads, actually exchange Naira as low as N680 for one dollar.
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The rapid appreciation of the naira happened in just three to four days after losing 36.52% of its value from January to November 2022.
Analysts such as Ndubuisi Ekekwe have urged caution as Nigerians applaud the work of the EFCC and other government agencies to help the Naira.
Ekekwe, who is the head teacher at the Tekedia Institute, explained that the Nigerian naira in recent days has risen against the US dollar on a solid rumor.
According to him, nothing has changed regarding the exchange rate of the Naira against the US dollar.
“Basically, nothing has changed. But whatever happens, we must be happy that Naira is getting help – rumor or not. It has gone from $1000 to around $680 now. that it will go down to N200 /$ so that we can do reverse osmosis”
Several financial experts contacted by Legit.ng all share similar views, noting that the reason for the recent surge in the naira is mainly the events in the United States.
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CNBC reports that the dollar suffered its biggest two-day decline in nearly 14 years on Friday, November 11, 2022.
The decline follows the 7.7% year-on-year rise in consumer inflation, which exceeded the 8% forecast by analysts, marking the slowest rate since January.
Kunle Falyei, a financial analyst, noted that the fall of the dollar has also triggered the jump of other currencies around the world, just like the Naira.
For example, the Japanese yen has gained 22% against the dollar in 2022 and the pound has gained about 1.6% against the dollar.
The Chinese yuan rose 1.3% to its highest level in more than a month against the dollar.
While the euro rose 1.5% to $1.0356, its highest since August 2022.
The Nigerian currency, Naira, said earlier, regained 26.2% of its value in the parallel market.
Improve currency supply
A fantastic event last week that seems to have benefited the Naira is the rumor that the US government, like the CBN, will mop up dollars.
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Some media reported that the United States would restrict the acceptance of printed dollars below 2021 to thwart the supply of dollars in Africa.
As a result of this decision, many Nigerians who had hoarded dollars to sell in the market were forced to sell quickly to avoid losses, leading to an increase in currency liquidity.
BDC operators confirmed the increase in dollar supply and a drop in demand when contacted by Legit.ng
One of the trader Jamal said:
“The rate changes are really quite sudden, but that’s a result of the dollar going up in the market from the strong demand the week before.”
December 15, 2022 is only a month before the new naira banknotes enter circulation, and it is extremely difficult to predict what to expect before that date.
But one thing has been established, few rich Nigerians can significantly solve Nigeria’s problem.
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Following rumors that the US government was planning to mop up the dollar from African markets, the naira gained more than 20% of its value.
This demonstrates that only a few people can play a significant role in helping the Naira recover its lost value, not just the CBN.
Although the CBN is increasing forex liquidity to meet the real demand from the official market, and the federal government selling more crude oil for forex would also play a role in the full recovery of the Naira.
Nigeria’s foreign exchange reserves fall to lowest level in 2022
Meanwhile, the Central Bank of Nigeria revealed that Nigeria’s foreign exchange reserve is currently at its lowest level in 2022.
The CBN tapped into the foreign exchange reserve to meet the economy’s foreign exchange demands and to safeguard the value of the naira.
Legit.ng the analysis also revealed that the CBN had withdrawn more than $1.8 billion from foreign exchange reserves to combat currency depreciation.