The naira, Nigeria's official currency, has been experiencing fluctuations since the Central Bank of Nigeria (CBN) launched its new electronic foreign exchange trading platform. Analysts suggest that it may not exceed N1,500 per dollar in the near future.
Last Friday, the naira rose to N1,515 per dollar in the parallel market as traders sold off dollars in reaction to the CBN's updated foreign exchange framework. In the official market, the naira also appreciated by 2.08 percent, or N32, closing at N1,535, compared to the previous day's rate of N1,567, according to data from the CBN.
Forex traders on the street are concerned that the dollar's declining strength could lead to a drop in the naira to N1,400 this week.
When asked if the naira could reach N1,400 this week, Aminu Gwadabe, president of the Association of Bureaux De Change Operators of Nigeria (ABCON), responded, “It is possible given the increased investor confidence, but I believe that further appreciation may not surpass N1,500/$.”
Bismarck Rewane, CEO of Financial Derivatives Company, predicts that the naira could appreciate to N1,525 per dollar by 2025.
On November 26, 2024, the CBN mandated all banks in the interbank foreign exchange market to utilize the Bloomberg BMatch system for trading. This platform, which became operational on December 2, 2024, is designed to improve transparency and operational efficiency within Nigeria's foreign exchange market.
Gwadabe attributes the recent strengthening of the naira to several factors, including heightened investor confidence, increased foreign exchange inflows, and market reforms. He noted, “The growing confidence among portfolio investors has led to significant dollar inflows, as shown by the oversubscribed bond issues. This has played a crucial role in the naira's recovery.”
He highlighted the increase in crude oil and gas production, which has enhanced Nigeria's foreign exchange reserves, along with a rise in remittances from the diaspora. "Remittances from the diaspora have surged to approximately $600 million each month via international money transfer operators (IMTOs), which has contributed to the strengthening of the naira," he remarked.
Gwadabe also acknowledged the role of the FX Trading and Reporting System (EFEMS) in promoting transparency, accountability, and visibility within the foreign exchange market. "The EFEMS platform has introduced essential reforms, resulting in a more stable and predictable market environment," he added.
Muda Yusuf, Chief Executive Officer of the Centre for the Promotion of Private Enterprise (CPPE), commends the recent improvements in the naira's exchange rate, characterizing it as a positive development for individuals and businesses navigating current economic challenges.
He notes that the currency's appreciation mitigates a key driver of inflation and the increased cost of operating businesses in Nigeria. "This is welcome news for both individuals and corporations, as the exchange rate has been a critical economic headwind, significantly impacting inflation and business costs. This positive trend is therefore a considerable relief, and we anticipate its continuation," stated Yusuf.
Yusuf attributed the recent stability and appreciation of the naira to several key factors, most significantly the increase in Nigeria's foreign reserves, which have recently exceeded $40 billion. This strengthens the Central Bank of Nigeria's (CBN) ability to intervene in the foreign exchange market, thus reducing volatility.
He further stated that the substantial reserve growth positions the CBN more effectively to manage the foreign exchange market, and that interventions have contributed to the relative stability and recent strengthening of the naira's exchange rate over the past five months.
Yusuf also pointed to reforms in the foreign exchange market as a catalyst for increased autonomous forex inflows, particularly from international money transfers. He highlighted the recent issuance of a two billion dollar eurobond by the Nigerian government as a key factor in bolstering investor confidence.
"As confidence grows, speculative demand in the foreign exchange market is expected to decline, and we are already seeing this trend. The CBN has been proactive in improving the foreign exchange environment by addressing malpractices and curbing speculative activities, which have contributed to this favorable development," Yusuf remarked.
While recognizing the advancements made, Yusuf stressed the importance of maintaining alignment between fiscal and monetary policies to sustain the current exchange rate stability. He identified government spending, fiscal deficits, and debt accumulation as crucial factors that could either reinforce or jeopardize this progress.
Our fiscal operations must be structured to avoid creating liquidity issues within the economy, as these could exert additional pressure on the Naira. It is essential to manage deficits, control debt levels, and potentially reduce government spending to align with the progress being made on the monetary front, he advised.
Yusuf also emphasized the need for intensified efforts to enhance oil production and combat oil theft, noting that increased oil output would bolster Nigeria's foreign exchange earnings. He highlighted the significance of supporting local manufacturing and initiatives aimed at import substitution, pointing to projects like the Dangote Refinery as vital for decreasing the demand for foreign exchange related to fuel imports.
"We must back all initiatives aimed at increasing exports—be it crude oil, gas, or non-oil products. Boosting our foreign exchange earnings is crucial for maintaining and potentially improving the value of our currency," Yusuf stated.
He urged policymakers to adopt a balanced approach, integrating fiscal prudence with proactive measures designed to boost production and export capabilities.
He concluded that sustainability is paramount, and that a judicious combination of fiscal and monetary policies will ensure continued positive economic momentum and foster long-term growth.