Market News

Clearly, last week’s performance of the naira was one of its best in recent time as the ailing local currency appreciated to N1,431/$1 on Friday, March 22, the best rate since February 5th when it closed at N1419.86/$1. Indeed, data obtained from the FMDQOTC, where the exchange rate is officially set, revealed that the naira gained 1.52 per cent at the close of business last Friday, sustaining an upside momentum that started penultimate Friday, during which the local currency gained over 12 per cent.

Specifically, data released by FMDQ last Friday indicates that the naira recorded an intra-day high and low of N1,468/$1 and N1,301/$1 respectively, while the NAFEX rate stood at N1,381.35/$1. ily turnover was $199.7 million resulting in a total turnover of $1 billion last week alone, suggesting improved liquidity in the market. 

Traders attributed the naira’s significant appreciation in the official market last week to the CBN’s intervention. According to market sources, the apex bank likely sold over $50 million in its bid to boost supply of the greenback. With improved liquidity in the official market, the naira also continued its recovery in the parallel market last week as it strengthened to N1,450 per dollar on Friday compared with N1,500/$1 on the previous day.

Policies yielding results Analysts’ reactions to the naira’s rebound last week indicate that they believe that recent policy actions of the CBN are responsible for the local currency’s recovery. In fact, while briefing journalists on the outcome of the CBN’s Monetary Policy Committee (MPC) meeting held on February 27, the apex bank Governor, Mr. Olayemi Cardoso, disclosed that regulator’s ongoing forex reforms, as well as an increase in oil production, pushed the external reserves to $34.51 billion as of February 20, 2024. He said: “Gross external reserves stood at $34.51 billion on February 20, 2024, compared with $32.23 billion at end-January 2024. 

The improvement was driven by reforms in the foreign exchange market and an increase in oil production amongst others,” adding that members of the committee were, “convinced that the ongoing reforms in the foreign exchange market will yield the desired outcome in the short to medium term.” According to Cardoso, “some of these reforms include: The unification of the foreign exchange market; promotion of a willing buyer willing seller market; removal of all limits on margins for IMTO remittances; introduction of a two-way quote system and the broad reforms in the BDC segment of the market to restore stability, enhance transparency, boost supply, and promote price discovery in the Nigeria Autonomous Foreign Exchange Market (NAFEM).”

Final settlement of forex backlog Interestingly, last Wednesday, the Acting Director, Corporate Communications at the CBN, Mrs. Hakama Sidi Ali, announced, via a statement, that the regulator had settled all valid foreign exchange backlog, thus, “fulfilling a key pledge of the CBN Governor, Mr. Olayemi Cardoso, to process an inherited backlog of $7 billion in claims.” She noted that the CBN recently concluded the payment of $1.5 billion to settle obligations to bank customers, effectively settling the residual balance of the FX backlog. She also disclosed that independent auditors from Deloitte Consulting meticulously assessed all the transactions, ensuring that only legitimate claims were honoured. 

According to her, any invalid transactions were promptly referred to the relevant authorities for further scrutiny. Her statement partly read: “At a recent meeting, Governor Cardoso declared: ‘We made clearing the FX backlog a priority to restore credibility and confidence in the Nigerian economy. ‘It was important that we go through an independent and credible process that would determine the authenticity of those obligations, and, at this point, I can tell you that we have now cleared all genuine, verifiable transactions. 

This encumbrance to market confidence in the country’s ability to meet its obligations is now totally behind us.’ “Clearance of the foreign exchange transactions backlog is part of the overall strategy detailed in last month’s Monetary Policy Committee meeting to stabilise the exchange rate and thereby curb imported inflation, spurring confidence in the banking system and the economy. “Cardoso used the MPC meeting and a subsequent conference call with foreign portfolio investors to set expectations for sustained increases in Nigeria’s foreign currency reserves and improved liquidity in the foreign exchange market. “The CBN followed this month by reporting a significant increase in external reserves, rising by $993 million to $34.11 billion as of March 7, 2024, the highest level in eight months.

The month-on-month increase was driven by a marked advance in remittance payments by Nigerians overseas, as well as higher purchases of local assets, including government debt securities, by foreign investors.” Goldman Sachs’ naira forecast The CBN’s position that its policy actions had restored confidence and credibility in the country’s economy, seems to have been validated by a report released earlier this month by global investment bank, Goldman Sachs, which predicted that the naira will appreciate to N1,200 per dollar within the next 12 months. According to the bank, Nigeria’ account surplus, which stood at +3.5 per cent of GDP in the third quarter (Q3) of 2023 is expected to increase above +5.0 per cent on the recent FX moves and associated import compression. “We thus see reason for the naira to be undervalued, and we see it appreciating to N1,200 within the next 12 months,” the bank stated. It added that given a combination of positive real rates, limited capital inflows, and evidence of a shift to a more orthodox policy set-up, it believes that “Nigeria is turning the corner following its recent currency crisis.”

As the bank put it: “These developments have prompted us to shift to a constructive outlook for the naira, which our FX strategists expect to appreciate to N1,200 vs. the dollar in 12 months. “We think the naira looks cheap on a REER basis in a historical context. Added to this, the current account surplus was +3.5 per cent of GDP in 2023 Q3, and we expect it to increase above +5.0 per cent on the recent FX moves and associated import compression. We thus see the reason for the naira to be undervalued, and we see it appreciating to N1,200 within the next 12 months.”

Also reacting to recent developments in Nigeria’s fx market, the Chief Economist for Africa and the Middle East at Standard Chartered, Razia Khan, was last week reported by Bloomberg as saying that she sees the naira ending 2024 in a 1,200-1,300 per dollar range as a result of steps taken by the CBN to attract foreign portfolio investors. She was quoted by the news agency as saying that “in more benign conditions, we could test even N1,100 a dollar or lower. Some of the forex backlogs have been cleared, monetary policy has been tightened and the transmission mechanism of policy is more effective.”

Doubts over Nigeria’s external reserves However, there are doubts in some quarters over the aforementioned forecasts given that in its latest report on Nigeria, the International Monetary Fund (IMF) projected that the country’s external reserves, which stood at $32.9 billion at the end of 2023, would drop to $24 billion this year. The IMF stated: “Through 2024–25, the financial account is likely to deteriorate, with no projected issuance of Eurobonds, large Fund and Eurobond repayments of $3.5 billion, and portfolio outflows. “Hence, despite a current account surplus, officially reported reserves are projected to decline to $24 billion in 2024 before increasing again to $38 billion in 2028 as portfolio inflows resume.” 

Equally, analysts have pointed out that because a significant part of the current inflow of FX is from FPIs( which can be withdrawn during economic turmoil) the CBN should not be too optimistic about the current level of its dollar buffers.

Conclusion Still, the consensus among financial experts is that the apex bank deserves commendation for been able to stem the naira’s slide even if this may be for the short to medium term. This is because experts believe that the strengthening of the local currency will help to curb inflation.