Naira Backflips amidst Twisted FX Outlook
Nigeria’s local currency, the naira, depreciated across foreign currency markets due to an inconsistent supply of US dollars to meet the peculiar needs of eligible entities that require FX to close, settle foreign currency transactions.
The recent positive exchange rate movement, however, showed there is hope for the local currency to rebound if the market remains saturated with sizeable FX liquidity to suppress demand pressures.
Although there were optimistic expectations, the outlook for the local currency has deteriorated since market players realised that a delay in the infusion of US dollars would have an instantaneous effect on the exchange rates direction.
Nigeria is still begging for FX inflows, attracting mostly hot monies, which is a short-term approach to quench demand pressures across forex markets. At a forum by MarketForces Africa, Broadstreet analysts maintain that there is need to balance supply and demand equation.
“It is all about liquidity in the forex market. The more there is, the better for the naira”, analysts agreed, noting that government must work to earn more from export trades rather than focusing on hot money.
“What about opening up windows for additional, more solid export receipts? What about proper communication that using dollar to conduct certain transaction is NOW highly prohibited in Nigeria?”, a financial expert told MarketForces Africa in a chat.
The Nigerian naira has seen a slowdown in its recovery pace amidst unstable FX sales to informal currency traders. The Nigerian naira depreciated by 2.24% against the US dollar in the Nigerian autonomous foreign exchange (NAFEM) window, closing at a rate of ₦1,339.23.
Nigeria’s gross external reserves grew to $32.131 billion, reversing rapid depletion experienced in the recent past. The apex bank said the decline in foreign reserves was to meet eligible obligations, in contrast to speculation that the authority depleted the balance in the nation’s foreign reserves to defend the local currency.
The Central Bank of Nigeria (CBN) has been using a short-term approach to management pressures facing the local currency across the forex market. Nigeria, with its low foreign exchange earnings, imports the majority of needs that cannot be satisfied domestically.
In separate discussions, analysts have maintained that one of the major obstacles facing Nigeria’s naira valuation is an imbalance created by the country’s low foreign currency inflows amidst continuous increase in import obligations and other foreign exchange exposures.
Last week, exchange rates across markets reversed previous patterns, despite the fact that the apex bank sold FX to Bureau de Change (BDC) operators to meet market demand from invisible transactions.
The CBN sold to the BDCs at the rate of 1,021, an 8.1% reduction from N1,110 per US dollar in its previous Forex sale at the informal market. Analysts expect this move to further strengthen the CBN’s position in maintaining currency stability and improving market liquidity.
The Federal Account Allocation Committee (FAAC) disbursed a total of N1.10 trillion to the three tiers of government in March 2024 versus N2.07 trillion in Feb, marking the end of the consecutive increase in allocation from September 2023.
This reduction was primarily due to a decline in foreign exchange and statutory revenues during the period. We expect that the continuous depreciation of the naira may improve distributable revenue from FAAC in the near term. Naira Suffers Big, CBN Goes Ballistic Against FX Whales
