The exchange rate is on the verge of crossing the N600/$1 mark

Foreign investors who were paid dividends for the 2021 financial year wish to repatriate their money, putting Nigeria's exchange rate at risk of exceeding N600/$1 on the unofficial FX market.

On the black market, the naira is now trading at a record high of N588/$1, as demand pressure continues to push the rate higher. According to statistics, the peer-to-peer market exchange is now trading at N583/$1.

However, the Naira faces significant depreciation as a result of dividends declared by big firms in the local stock market to their owners, which includes international investors looking to repatriate their cash.

GTCO, Zenith Bank, Dangote Cement, Lafarge Africa, Access Bank, Nigerian Breweries, and MTN Nigeria, among other major corporations, have all declared final naira dividends for the fiscal year 2021, while Seplat Petroleum has declared a $0.075 dividend per share. Some of these dividends were paid in March, while others are scheduled to be paid in April and May 2022.

Meanwhile, the majority of these declared dividends are paid in local currency, which means that international investors who want to take their returns or earnings home will have to exchange them for dollars, driving up the exchange rate even more.

This is exacerbated by a drop in foreign exchange inflows into the country. Nigeria's capital importation fell to a 5-year low of $6.7 billion in 2021, according to new statistics from the National Bureau of Statistics. The dip is due to a considerable decrease in both direct and portfolio investments.

Meanwhile, the majority of these declared dividends are paid in local currency, which means that international investors who want to take their returns or earnings home will have to exchange them for dollars, driving up the exchange rate even more.

This is exacerbated by a drop in foreign exchange inflows into the country. Nigeria's capital importation fell to a 5-year low of $6.7 billion in 2021, according to new statistics from the National Bureau of Statistics. The dip is due to a considerable decrease in both direct and portfolio investments.

According to the NGX foreign portfolio report, foreign transactions on the local market fell by 40% to N424.5 billion last year from N729.2 billion the previous year. In the same line, FPI's share of overall NGX trading fell from 33.63 percent to 22.88 percent in the year under review.

What BDCs Have to Say

In a conversation with Bureau De Change operators in Lagos State, they told Nairametrics that the next election in 2023 is already having an impact on the foreign exchange market, as demand for forex has outstripped supply, causing the exchange rate to rise.

According to Abdulai, politicians and stakeholders are now buying and hoarding FX for their next year's campaigns, which has impacted market liquidity, with supply not improving.

Similarly, Anwal Usman, a BDC operator in Lagos, indicated that the FX market's volatility is due to a shortage of currency supply, while demand has risen sharply in recent weeks.

"Dollar demand has surged dramatically, especially as the election approaches," he said, explaining why the exchange rate has risen.

Closer Look

On Friday last week, the official Investors and Exporters window exchange rate closed at N416.33/$, a 0.08 percent depreciation from the previous trading session's rate of N416/$.

The prior week's penultimate trading session saw a total of $119.64 million moved, down 16.3 percent from the $142.95 million traded on Thursday.

The continued reduction in foreign exchange inflows into Nigeria's economy has put severe pressure on the local currency, causing Nigeria's foreign reserve to fall by $991.94 million to $39.53 billion year-to-date.

Despite the apex bank's continued intervention in the official market, the FX rate through the I&E window has remained constant at N416 to a dollar.

While Nigerians are already dealing with rising commodity and service prices as a result of the global energy crisis, food inflationary pressure, and unreliable power supplies, a further devaluation in the naira will put even more strain on the typical Nigerian.