Exchange Rates Improve as CBN Reboots FX Reform
The Nigerian naira has started recovering from demand shocks across foreign exchange markets as oil exports boost gross external reserves position. Exchange rates across the forex market improved last week with the naira recording gains at the Nigerian Autonomous Foreign Exchange Market and the parallel market where the local exchnage is freely traded against the US dollar.
Analysts noted FX users’ sentiment was boosted by expected inflows of $10 billion into the economy in the latter part of the year. Data from FMDQ showed that the Naira recovered from its peak spot rate of N993 to close at N776.14 at the official window as an invisible hand touched the demand and supply of the US dollar in the market.
In the parallel market, the exchange rate appreciated to N995 in the black market having peaked at N1,300, according to MarketForces Africa FX watch chart. The local currency appreciated due to improved sentiment across the forex market due to an expectation of a $10 billion inflow into the economy – the amounts analysts think would help to push FX reform.
In June 2023, the Nigerian government influenced the Central Bank to launch FX reform with a large devaluation of the naira. However, the liberalisation went cold due to the apex bank’s inability to bolster US dollar supply into Investors’ and exporters’ window, while demand was channelled to the parallel market.
Recent events in the past weeks have however sent positive signals across the forex market as the authority shifted attention to reflating performance of the naira. Analysts attribute positive exchange rate movement to the CBN’s latest policy drive targeted at ensuring that the local currency is uncaged from US dollar dominance.
As part of the effort to keep the naira stable, the CBN removed restrictions on 43 items from accessing forex from an official window. The CBN also paid about $7 billion to banks to clear forex backlog.
“These decisions are part of big things to come from the monetary authority in the coming out – handwriting is clear this government is seeking to prove a point with economic management”, LSintelligence Associates said. Nigeria’s FX reserve increased for the fourth consecutive week as the gross reserve level advanced by USD60.15 million to close at USD33.40 billion, data from the CBN show.
Analysts said the increase has been supported by a healthy improvement in crude oil production at relatively high prices of oil in the global market. After four months of a sustained uptick, the global crude oil prices cooled off mildly in October, evidenced by the 3.1% month-on-month decline in Brent crude oil price to $90.78 per barrel.
In its market update, Afrinvest said the price moderation was driven by the combined impact of slowing demand from China amid weak economic fortune, higher crude production in the US, and positive progress on diplomatic moves to prevent the Israel-Hamas war from escalating.
This improvement in gross external reserve reflects the anticipated gains from the noticeable increase in Nigeria’s crude oil output in the prior month, according to Afrinvest. The firm said output was up 14.1% to 1.35mbpd in September 2023, the highest in 20 months, supported by the steadiness of global crude oil prices north of $80.00 versus $75.00 set in the 2023 budget.
Due to intermittent demand shock, the naira had run amok in the forex market, trading near N1,000 at the official window while the exchange rate crossed N1300 in the parallel market.
Afrinvest attributed the material devaluation of the Naira in both market segments in the month to the market’s knee-jack reaction to the CBN’s reversal of the ban on 43 items from the official window without an immediate or frontloaded supply boost.
“ we expect FX liquidity conditions to improve slightly, albeit still frail relative to historical standards, as it appears the CBN has regained its momentum regarding FX reforms”, Cordros capital said.
Consequently, if the recent convincing actions by the policymakers to turn the tide are sustained, analysts at Cordros Capital said they expect the local currency pressures to ease.
Cordros Capital expects foreign investors to be keenly watching the development in the FX space with regard to the expected FX inflows as guided by the authorities, CBN’s recent actions in clearing its FX backlogs, and firm direction of short-term interest rates. Nigeria Eurobond Slumps after CBN Resumes OMO Auction
