Naira Somersaults as CBN Rethinks ‘Dirty Float’

The naira got knocked down as local currency value spiralled downward after the Central Bank of Nigeria (CBN) abstained from intervening in the forex markets.

Both black and official markets got spooked in the just concluded week amidst a sustained decline in the nation’s gross external reserves

The Nigerian Naira depreciated by 11.40% against the US Dollar in the Nigeria Autonomous Foreign Exchange Market (NAFEM), closing at a rate of N927.19.

Positive sentiment that pumped the naira strength after the Central Bank FX backlog payment has fizzled out amidst the monetary authority’s decision to leave the local currency in the cold hands of forces of demand and supply.

In the parallel market, the Naira depreciated by 0.09% day-on-day to close at N1,163 per dollar due to sustained demand for the dollar. 

In the global commodity market, oil prices experienced a positive trend, with Brent Crude trading at $80.96 per barrel and WTI at $76.11 per barrel on Friday.

Based on the data obtained from FMDQ, total inflows into the Nigerian Autonomous Foreign Exchange Market (NAFEM) increased by 15.6% month on month to USD1.43 billion in November from USD1.23 billion registered in October 2023.

Analysts at Cordros Capital attribute the outturn to the higher inflows across local (81.5% of total transactions) and foreign sources (18.5% of gross transactions) in the period.

In the period, inflows from local sources increased by 8.2% to USD1.16 billion in November from USD1.07 billion, analysts said.

The surge was driven by higher accretions of 27.3% from Individuals and 13.2% jumps in Non-Bank Corporates in November. Also, inflows from exporters grew by 3.8% in the month, without any inflow from the CBN.

This move signals a reversal from its dirty float stance where the exchange rate is allowed to fluctuate on the open market, but the central bank can intervene to keep it within a certain range or prevent it from trending in an unfavourable direction.

According to Cordros Capital, collections from foreign sources surged by 65.8% month on month to USD263.20 million from USD158.70 million in October 2023 – although still significantly below the pre-pandemic level (Q1-20 average: USD1.28 billion).

“Over the short to medium term, we anticipate a modest improvement in FX liquidity conditions, though frail relative to historical standards.

“We expect foreign investors to closely monitor the development in the FX space, particularly focusing on the expected FX inflows as guided by the authorities, CBN’s actions in clearing its FX backlogs, and firm direction of short-term interest rates”, Cordros Capital said in a macro note. Nigeria Eurobond Slumps after CBN Resumes OMO Auction