Nigeria: Special Report - Forex: Dynamic Instability Amidst CBN's Interventions

29 May 2020

Nigeria's foreign exchange market under the five years of the Muhammadu Buhari Presidency is characterised by two bouts of naira devaluation, each preceded by prolonged period of steady decline in external reserves, triggered by sharp fall in crude oil price, and exit of foreign portfolio investors from the country.

Devaluation in 2016

The first devaluation occurred in 2016 when the naira was devalued to N305 per dollar in the official foreign exchange market, from N197 per dollar in 2015. In the parallel market, the naira depreciated to N490 per dollar in 2016 from N220 per dollar in 2015.

The 2016 naira devaluation followed steady decline in external reserves to $26.98 billion in December 2016 from $29.35 billion at the end of March 2015, shortly before Buhari became the President.

While the devaluation followed the introduction of a more flexible exchange rate regime by the CBN in June 2016, the apex bank introduced a series of measures which enhanced foreign exchange inflow and stabilised the naira exchange rate. These include: Sale dollar sales to Bureaux De Change, BDCs, via proceeds of international money transfer; Introduction of Non Deliverable Nair Settled Forex Futures; and the Introduction of the Investors and Exporters, I&E, window.

These measures, especially the I&E window revived foreign exchange inflow into the country especially from Foreign Portfolio Investors, FPIs. This coupled with improved revenue from crude oil due to rise in crude oil prices, led to two and half years rise in the external reserves from $26.98 billion at the end of 2016 to $45.175 billion at the end of June 2019.

As a result, the naira enjoyed relative stability in the foreign exchange markets. From August 2017, three months after the introduction of the I&E window, the naira exchange rate stabilised around N360 per dollar.

COVID-19 induced devaluation

But this stability was shattered in the first quarter of 2020. On March 20, the CBN devalued the naira to N380 per dollar in the I&E window, and to N360 per in the official rate. Accordingly the naira fell to N395 per dollar in the parallel market on the same day.

The devaluation was triggered by nine months steady decline in the nation's external reserves. The decline which started July 2019, due to exit of FPIs from the nation's fixed income market, was aggravated by the sharp decline in crude oil prices due to the impact of the COVID-19 pandemic on the global crude oil market.

Consequently, the external reserves fell by 22 percent to $35.16 billion at the end of March 2020, from peak of $45.175 on June 10, 2019.

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