In its Global Financial Stability Report, the IMF acknowledged the policy measures taken by Nigerian authorities, highlighting the CBN's actions to address overdue foreign exchange commitments as crucial to the naira's perceived stabilization. The IMF stated, "Policy actions by local authorities have also resulted in positive developments; for example, in Nigeria, rate hikes and the clearing of overdue domestic central bank foreign exchange obligations have helped the naira show more signs of stability."
Conversely, Fitch's recent assessment of Nigeria presents a more cautious perspective. The agency remarked, "The Central Bank of Nigeria is implementing several strategies to tackle foreign exchange liquidity issues and formalize foreign exchange activities to bolster the currency. These strategies include plans to launch an electronic foreign exchange matching platform for all transactions starting December 1, 2024, aimed at providing real-time intra-day pricing and enhancing transparency."
Additionally, the CBN has increased the monetary policy rate five times, totaling an increase of 850 basis points to reach 27.25 percent since February 2024. However, Fitch maintains that the foreign exchange market has not yet stabilized, and the ongoing flexibility of the exchange rate remains untested.
Fitch also observed a rise in Nigeria's gross foreign exchange reserves, which climbed to $39 billion in mid-October from a low of $32.1 billion in mid-April. The agency attributed this increase to official disbursements, remittances, portfolio inflows, and an improved trade balance, the latter of which has been supported by reduced imports due to higher domestic refining output and the dampening impact of currency depreciation on local demand.
“We forecast FX reserves to rise to 6.1 months of current external payments at end-2024 (‘B’ median 3.7) and to average 5.3 months in 2025-26,” Fitch added.
The agency has raised concerns about the actual net reserves situation, suggesting that approximately 25% of the current gross reserves consist of foreign exchange swaps with local banks.
"There is considerable uncertainty regarding the magnitude of net reserves. We estimate that roughly one-quarter of the existing gross reserves are tied up in FX swaps with local banks, although we anticipate that most of these will continue to be renewed," Fitch remarked, emphasizing that while these FX swaps are likely to be extended, they still add to the unpredictability of the foreign exchange market's stability.
Recently, CBN Governor Olayemi Cardoso stated that confidence in the naira is "gradually returning," highlighting the central bank's commitment to maintaining stability.
During the World Bank's launch of the Nigeria Development initiative last month, Cardoso remarked, "The confidence in the naira is gradually returning due to the policies we are implementing, which align with orthodox monetary policy, ultimately encouraging people to retain their naira holdings."
He further expressed optimism, stating, "Over time, we believe that confidence will continue to rise."
Cardoso explained that orthodox policies are designed to bolster trust in the naira, which he believes will enhance its credibility.
The CBN governor emphasized that the central bank is actively working to stabilize the exchange rate, which has experienced fluctuations since the market segment was unified last June.
"The CBN does not set the exchange rate; the fundamentals do. We will implement policies to ensure that the necessary frameworks are in place in the market," he stated.
Cardoso also mentioned that the CBN is dedicated to promoting transparency and penalizing those who attempt to exploit the market.
He pointed out that the monetary policies are facilitating foreign exchange inflows, contributing to an increase in the country’s reserves, which reached approximately $39 billion in October.
Nevertheless, despite the CBN's efforts, challenges remain in the market, with the naira trading above N1,600.
In the most recent Purchasing Managers’ Index report from Stanbic IBTC Bank Nigeria, the private sector in Nigeria is grappling with escalating challenges as the depreciating naira continues to elevate purchasing costs. The report states, “A significant rise in purchase costs is attributed to currency weakness and increased prices for fuel and transportation.”
It highlights that inflationary pressures have surged, with input costs escalating at one of the highest rates observed, resulting in increased prices for goods and services and a subsequent decline in demand and business activity. In October, the PMI fell to 46.9, marking a 19-month low and indicating a significant deterioration in business conditions compared to September’s figure of 49.8.
A PMI reading below 50 indicates a contraction in the sector's performance. The report points to currency depreciation as a primary factor in this downturn, exacerbating the costs associated with fuel, transportation, and other vital imports. Companies have been compelled to significantly raise their selling prices to mitigate these input costs, reflecting the fourth-highest rate of charge inflation recorded.
The rise in operational expenses has also affected employees, as businesses have increased wages to address the growing cost of living, resulting in the largest wage increase in seven months. Despite a decline in new orders, firms have slightly increased staffing levels, continuing a six-month trend of job creation. However, these adjustments have been modest, with some companies choosing to downsize in response to financial constraints.
The weakening demand has led businesses to reduce their purchasing activities, marking the steepest decline in input buying since March 2023. As a result, inventory levels have decreased for the third consecutive month as companies adjust to falling client orders. Muyiwa Oni, Head of Equity Research for West Africa at Stanbic IBTC Bank, remarked that the significant inflation and currency-related challenges are intensifying Nigeria’s economic difficulties.
He noted that the persistent pressures on the exchange rate, combined with elevated interest rates, are expected to hinder growth in the non-oil sector, despite the potential for some relief from improved crude oil production.
Oni stated that private sector activity in Nigeria deteriorated further in October, with the headline PMI dropping to a 19-month low of 46.9 points, down from 49.8 in September.
The primary factor contributing to this decline in the business environment was a deepening of already significant inflationary pressures, driven by currency depreciation and rising costs for fuel and transportation.
As a result, there was a significant decrease in new orders and overall business activity, with business sentiment reaching its lowest point since the survey's inception in January 2014. Three out of the four sectors monitored experienced a decline in output, with only the agriculture sector managing to achieve an increase.
Despite a substantial drop in new orders in October, Nigerian firms continued to slightly increase their workforce, extending the current streak of job creation to six months.
The downturn in the business climate intensified at the beginning of Q4:24, reflecting the ongoing effects of price pressures on consumer demand and business investments.
The pressures from currency fluctuations and high interest rates are further exacerbating the challenges faced by the private sector.
This situation suggests that growth in the non-oil sector will remain subdued, although improved crude oil production compared to the previous year may help mitigate the underperformance of the non-oil sector.
As the difficulties in the foreign exchange market continue, the Central Bank of Nigeria (CBN) intends to implement an Electronic Foreign Exchange Matching System designed to revamp the country's foreign exchange market.
While this new system is expected to be operational in the Nigerian Foreign Exchange Market by December 1, 2024, the CBN has scheduled a two-week test run for November.
The EFEMS is anticipated to transform the execution of foreign exchange transactions within the interbank market by improving transparency and fostering a market-driven exchange rate that is available to the public.