The past twelve months have been rather interesting for the forex market in Nigeria. Over the course of the year, various changes have taken place both at the economic and political realms. The naira has thus been affected by the events, albeit in a minor way. Compared to last year, the changes in the market have not been as huge. The naira has traded at the rate of about N360 to a US dollar. The exchange rate at the IEFX has also been at a similar range of N360-N362.
The stability of the naira was however not without tests, particularly at the IEFX. Over the course of the year, the currency slumped to N364 per dollar and went as far as N362. Many issues were behind this depreciation. Key among these is the pressure at the forex market itself. The market has been facing demand issues and this caused the currency to slump for a little while. The depreciation was however short-lived. Before the naira bounced back to the normal rate, the IEFX figures recorded it to be at N362.93 by mid-September.
Rates were still higher than the street average
Considering that the average rate of the naira is N361 per dollar, the mid-September figure was still higher by up to 0.5%. While this was the situation of the market at the time, the economy was and still is reeling from declining gross external reserve levels. The resistance level was recorded at $46bn by mid-September. Such figures are not only a concern of government economists but also for the average trader in the market.
The government intervention in the market went down to $3.55bn in Q3. The figures for the previous quarter were at $4.26bn. These figures reflected the Central Bank of Nigeria’s stance in the forex market. Not only did the top bank reduce the intervention, but it also abstained from intervening in mid-September. This marked the first time that the bank failed to intervene during the quarter.
Economic factors are always at the center of happenings at the forex market. For the Nigerian economy, a couple of issues surrounding the demand and supply of currency have been the main issues over the course of the year. Forex markets the world over are characterized by seasons of lows and highs. While a particular market might not particularly untenable for traders, forex trading for beginners might be a little complicated at first.
Political issues are also part of the puzzle
Nigeria is not just grappling with economic issues in 2018. Soon after President Muhammadu Buhari took office mid-2015, the country sank into recession following a series of unfriendly economic policies. The 2019 election is closing in and there are uncertainties in the political realm. These uncertainties are enough to create a bit of uneasiness in the markets.
The incumbent president is being challenged by a former vice president, Atiku Abubakar of the main opposition political party, the People’s Democratic Party, PDP. Analysts and leading global banks have warned of the dire consequences of a re-election of Buhari. However, the opposition have raised alarm on plots by the government to rig the upcoming February 2019 poll.
Investor confidence is particularly swayed by the elections which tend to be a hot issue. Investors have thus been liquidating their assets since 2015 and this has affected the FDI into the country. The inflow of investment has been shown to have declined by 9.76% in Q2. This situation might likely persist until the political period culminates with the general election in 2019.
The effect of issues in the market on the economy
The forex market affects the economy in the same way that the vice versa is true. For Nigeria, the various factors surrounding the market demand and political issues will have effects in the medium and long terms. The approach taken by the CBN notwithstanding will also have ramifications for the economy, at least in the short term. The decline in the forex market has already been witnessed due to the failure of intervention by the CBN. The depletion of external reserves has played the key role in the non-intervention and the consequences have been manifested in a declining market.
As for the political issues, there will likely be more demands from the political spheres in the coming months. The pressure on the government over the current political period will ultimately have effects in the naira and the government might be forced to have more interventions in the near term. The pressure on the currency coming from all corners of the society will definitely affect the medium term period the most. The government’s ability to anticipate the economic issues over this period will be crucial for the forex market.