The Nigerian foreign exchange (forex) market is currently witnessing a significant downturn, with average daily turnover plummeting to its lowest level since January 2024.
This decline in forex turnover has coincided with a steady depreciation of the naira, which has now edged closer to N1600 against the US dollar in the official market.
This situation underscores the critical role of forex liquidity in maintaining exchange rate stability.
A decline in forex turnover
According to the latest data, the average daily forex turnover has seen a sharp decline, falling to $143.97 million in August 2024. This marks the lowest point since January 2024, when turnover was $97.36 million.
Over the intervening months, forex turnover exhibited some fluctuations, peaking at $252.55 million in March, but it has been on a downward trajectory since then.
The monthly turnover data highlights this decline:
January 2024: $97.36 million
February 2024: $222.85 million
March 2024: $252.55 million
April 2024: $194.16 million
May 2024: $209.39 million
June 2024: $195.95 million
July 2024: $184.34 million
August 2024: $143.97 million
This consistent drop, especially the 21% reduction observed in the first two weeks of August 2024, reflects a growing scarcity of dollars in the market, a situation that has been exacerbated by the Central Bank of Nigeria’s (CBN) policies, particularly its inconsistent dollar supply .
Impact on exchange rates
The declining forex turnover has had a direct impact on the naira’s value in the official market.
In early July 2024, the exchange rate averaged N1,508 per dollar, but by late August 2024, it had depreciated to nearly N1600 per dollar.
- This is despite the surge in remittance inflows—up 130% to $553 million. This depreciation reflects the correlation between forex turnover and the exchange rate, with reduced liquidity contributing to the naira’s weakening.
- The broader challenges facing the Nigerian economy are evident, as forex supply constraints increasingly influence the currency’s stability. Nigerian businesses are particularly concerned about this trend.
- A recent CBN survey revealed that many businesses expect further devaluation of the naira in the coming months, driven by ongoing pressures in the forex market.
- The current decline in forex turnover signals a tightening of dollar availability, which has exacerbated the upward pressure on the naira-dollar exchange rate.
Moreover, the surge in remittance inflows has not been sufficient to offset the declining forex turnover. This highlights that while remittances remain an important source of forex, they are not enough to stabilize the naira without consistent and adequate dollar supply from the CBN.
Inconsistent dollar supply and market sentiment
Market operators, including Bureau De Change (BDC) operators, have voiced concerns over the CBN’s inconsistent dollar supply, which they argue is hampering efforts to stabilize the naira .
The CBN’s approach to dollar auctions and its management of forex reserves are seen as pivotal factors in the current market dynamics.
- The lack of a predictable and steady supply of dollars has eroded confidence in the market, contributing to speculative activities and further weakening of the naira.
- The sharp decline in average daily forex turnover to its lowest level since January 2024 has had significant repercussions for the naira, which has depreciated close to N1600 in the official market.
- This trend highlights the critical importance of forex liquidity in maintaining exchange rate stability.
- As the CBN grapples with the challenges of managing dollar supply, the market remains vulnerable to further depreciation, especially if forex turnover continues to fall.
- The outlook for the naira remains uncertain, with businesses and market operators alike bracing for potential further devaluation in the months ahead.