Naira Plunges to Record Low as CBN Removes Rate Cap on I&E Window

Ilesanmi AdekanbiJune 15, 2023

2 minutes read

The Nigerian currency, the naira, suffered a massive depreciation against the dollar at the Investors and Exporters (I&E) window on Wednesday, closing at N664.04 to the dollar.

This represents a 40.78 per cent decline from N471.67 per dollar on Tuesday, according to data from FMDQ securities.

The sharp fall of the naira followed the directive by the Central Bank of Nigeria (CBN) to banks and other authorized dealers to abolish the segmentation of the foreign exchange market and allow a “willing buyer, willing seller” model at the I&E window.

The CBN also instructed banks to remove the trading limits on oversold foreign exchange positions and reintroduce order-based two-way quotes with a bid-ask spread of N1.

The move was aimed at liberalizing the foreign exchange market and eliminating multiple exchange rates, which have been blamed for creating distortions and inefficiencies in the economy.

However, the immediate impact of the directive was a spike in the demand for dollars and a plunge in the value of the naira, which reached a record low of N791 per dollar at some point during the day’s trading.

The naira also depreciated at the parallel or black market, where it exchanged for N755 per dollar, down from N768 per dollar on Tuesday.

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The naira has been under pressure for several months due to dwindling oil revenues, low foreign capital inflows, high inflation and insecurity.

According to data from the CBN, the naira has depreciated by over 200 per cent against the dollar since 2015, when it traded at N196.5 per dollar at the official market.

Some analysts have welcomed the CBN’s decision to free up the foreign exchange market, saying it would enhance transparency and attract more foreign investors.

Prof. Ndubisi Nwokoma, Director of Centre for Economic Policy Analysis and Research at the University of Lagos, said: “The CBN decision is a good development, hoping that unnecessary arbitrage (round-tripping) would be eliminated from the market. We expect that the foreign exchange rate will trend downwards when foreign capital inflow increases, following from these.”

However, others have expressed concerns about the negative effects of the naira depreciation on inflation, external debt and consumer welfare.

The National Bureau of Statistics (NBS) reported that inflation rose to 18.17 per cent in March 2021, the highest level since April 2017.

Nigeria’s external debt also increased by 34.7 per cent to $33.35 billion as of December 2020, from $24.76 billion as of December 2019, according to data from the Debt Management Office (DMO).

The depreciation of the naira means that Nigeria will have to pay more naira to service its foreign debt obligations.

Moreover, many Nigerians who depend on imported goods and services will face higher costs and reduced purchasing power as a result of the naira depreciation.