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Experts predict improvement in FX liquidity, naira amid growth in reserves - THE SUN

JUNE 24, 2024

By Chinwendu Obienyi

Foreign exchange (FX) liquidity conditions and naira stability are expected to improve in the coming months amid the recent increase in the country’s gross reserve levels, economic analysts said at the weekend. This is coming after Nigeria FX reserves reached its highest level in three months as Friday’s increase of $297.97 million resulted in the FX reserve settling at $33.64 million. According to experts, this increase is expected to enhance the Central Bank of Nigeria’s (CBN) capacity to intervene in the FX market, stabilizing the naira and boosting liquidity. 

Although the naira depreciated by 0.2 per cent week-on-week (w/w) to close at N1,485.53/$1 at the Nigerian Autonomous Foreign Exchange Market (NAFEM), the naira has seen relative stability following reforms from the apex bank which helped to reduce over-dependence on parallel market for FX. Findings from the data obtained from the FMDQ’s website revealed that the naira has traded in a narrow range between N1,473/$1and N1485/$1. As a result, this has sent its 10-day rolling volatility to the lowest in a year and its 100-day swings to the least since November 2023. This, according to analysts at Cordros Research, is a temporary victory for the government after it had removed fuel subsidy and unified the exchange rates. Currently, FX inflows are reducing buyers’ need to load up on foreign exchange, thus curbing demand and price distortions.

Furthermore, in its attempt to rein in inflation, attract inflows, the CBN have raised interest rates thrice since the turn of the year. The bank has also done heavy mop-up of Naira liquidity through regular bond sales and dollar inflows from foreign lenders to stabilize the market. For instance, the country obtained about $925 million from Afreximbank, being the final tranche of crude oil backed $3.3 billion prepayment facility intended to boost the supply of FX on the local foreign-exchange market. Furthermore, the World Bank approved $2.25 billion funding to support the nation’s economic reforms which is expected to boost FX liquidity. 

Amid these moves, the total turnover (as of 20 June) at the market declined by 65.0 per cent week-to-date (WTD) to $351.83 million, with trades consummated within the N1,390.00/$1– N1,514.82/$1 band. In the forwards market, the naira rate decreased at the 1-month (-0.4 per cent to N1,506.13/$1), 3-month (-0.1 per cent to N1,550.10/$1), 6-month (-0.2 per cent to N1,620.54/$1) and 1-year (-0.4 per cent to N1,768.74/$1) contracts. 

Speaking on the development, experts noted that they expect improvements in FX liquidity in the near term. “FX liquidity was relatively lower this week, partly due to the shortened holiday week and muted inflows from the CBN. 

We highlight that despite improved inflows from FPIs in line with the CBN’s OMO issuances, the naira depreciated, primarily due to increased demand pressure. Going forward, we anticipate an improvement in FX liquidity as the partial disbursement ($750.00 million) of the World Bank’s Development Policy Financing loan ($1.50 billion) allows for more CBN interventions in the FX market”, Cordros Research said in an emailed note. Corroborating, economic expert, Omobola Adu, attributed the recent stability of the local currency to lower demand pressures as well as inflows from Afreximbank. Adu noted that the recently approved World Bank loan should provide more support for the Naira over the short to medium term, pending other potential inflows later this year.


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