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The naira’s rebound against major currencies, since hitting a record low of N1,900 per dollar in February, looks set to continue as the Central Bank of Nigeria (CBN) is introducing more measures to bolster the local currency, writes Tony Chukwunyem

Given that the naira plunged from N907 per dollar on the official at the end of last year to about N1,500/$1 at the end of February, the forecast by global investment bank, Goldman Sachs, in early March, that the local currency would appreciate to N1,200 per dollar within the next 12 months, may have sounded far-fetched to some observers.

The US-based lender had said at the time that it believed the naira was undervalued, adding that increased monetary policy tightening and the Central Bank of Nigeria’s (CBN) shift to a more orthodox policy set-up, led it to conclude that: “Nigeria is turning the corner following its recent currency crisis.” As the bank put it: “We think the naira looks cheap on a REER basis in a historical context. Added to this, the current account surplus was +3.5 percent 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.” Interestingly, the Chief Economist for Africa and the Middle East at Standard Chartered, Razia Khan, supported the stance of Goldman Sachs, stating at the time that she saw 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 stated: “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.”

Goldman Sachs’ new forecast

Her prediction seems to have proved remarkably accurate because last Friday, Bloomberg reported Goldman Sachs’ economists as saying that the naira had already established itself as the top-performing currency globally in April and that they expect the local currency to extend its gains and surpass their earlier forecast of N1,200/$1 in 2024, amid the CBN’s ongoing efforts to ensure exchange rate stability. Hinting at the possibility of the naira trading even lower than N1,200/$1, an economist at Goldman Sachs, Andrew Matheny, was quoted by Bloomberg to have said that “this probably can run further; we would see an extension of the move to N1,000 and maybe even sub-N1,000.”

He noted that since Goldman’s earlier forecast, “six weeks have gone by and they’re continuing to hold the line, so that’s encouraging.” Analysts point out that Goldman Sachs’ optimistic forecast was occasioned by the sustained rally of the naira observed across both the parallel and official segments of the foreign exchange market in the last few days.

Specifically, Bloomberg data shows that in April alone, the naira has surged 12 per cent against the dollar, adding to a one per cent increase in March. Also, at the Nigerian Autonomous Foreign Exchange (NAFEM) window (the official market), the naira closed at N1,142.38 per dollar last Friday compared to its closing rate of N1,230.61 per dollar last Monday.

Furthermore, the daily turnover on the official FX window saw an in crease of 124.71 per cent, reaching $281.34 million on Friday, compared to the $125.55 million recorded on Monday. Similarly, on the parallel market, the naira’s rebound continued, as it strengthened to N1,150 per dollar last Friday, compared to N1,240 per dollar on Monday.

Apex bank’s measures

Financial experts attribute the naira’s steady recovery against the dollar at both the official and parallel markets to the CBN’s decision to intensify its foreign exchange measures. Indeed, at the last meeting of its Monetary Policy Committee (MPC) held on March 25 and 26, the regulator raised the Monetary Policy Rate (MPR)-the benchmark interest rate by 200 basis points to 24.75 per cent from 22.75 per cent. It also adjusted the asymmetric corridor around the MPR from +100/-700 basis points to +100/-300 basis points.

Furthermore, while it retained the Cash Reserve Ratio (CRR) of deposit money banks (DMBs) at 45.0 per cent, the CBN increased the CRR of Merchant Banks (MBs) from 10 per cent to 14 per cent and left the Liquidity Ratio (LR) unchanged at 30.0 per cent. Experts also cite the CBN’s announcement on March 20 that it had settled all outstanding FX obligations, its directive to DMBs to stop the use of foreign currency denominated collaterals for naira loans as well as its resumption of dollar sales to eligible Bureaux De Change (BDCs), as some of the key factors responsible for the naira’s appreciation.

Forex sales to

BDCs In fact, forex traders believe that the naira’s significant strengthening at the parallel market in recent times is primarily as a result of the CBN’s resumption of dollar sales to BDCs. The apex bank had on February 28 announced that it would sell foreign exchange worth $20,000 to each eligible 1,373 BDCs across the country. This meant that it was resuming forex sales to this category of forex traders which it had stopped allocating forex to on July 27, 2021, on the grounds that the operators had deviated from the objectives for which they were set up and had become agents facilitating graft and corruption in the country.

Interestingly, in announcing the resumption of dollar sales to the BDCs, the CBN, in a circular titled, “Sale of Foreign Exchange to Bureau de Change Operators to meet retail demand for eligible invisible transactions,” said that the move was aimed at rectifying the persisting distortions in the retail segment of the foreign exchange market and bridge the widening gap in the exchange rate. It said the allocation would be sold at a rate of N1,301/$, reflecting the lower band rate of executed spot transactions at the Nigerian Autonomous Foreign Exchange Market as of the previous trading day, dated February 27, 2024. This meant BDCs would buy dollar at N1,301 and sell at N1,314.01.

In its second round of dollar sales to the BDCs last month, the apex bank sold $10,000 to BDCs at a rate of N1,251/$ and directed the BDCs to sell to eligible customers at a rate not exceeding 1.5 per cent above the purchase price (N1,269/$1). However, on April 6, the Association of Bureau De Change Operators of Nigeria (ABCON) appealed to the CBN to adjust and lower its applicable exchange rate below the N1,251/$ it pegged for its members. The association said the N1,251/$ applicable buying rate the CBN

The consensus among financial experts is that if the CBN succeeds in ensuring that the naira sustains its current momentum, it will also stand a good chance of making progress in its inflation fight

pegged for BDC operators would result in losses for its members, as the open market rate stood at N1,235/$. Consequently, the apex bank, last Monday, issued another circular to BDCs, informing them of the sale of $10,000 to each eligible BDC at a rate of N1,101/$1. In the circular, the CBN said each BDC must sell the dollars to eligible customers at a rate not exceeding 1.5 per cent above the purchase price.

The circular reads: “We write to inform you of the sale of $10,000 by the Central Bank of Nigeria (CBN) to BDCs at the rate of N1101/$1. “The BDCs are in turn to sell to eligible end users at a spread of not more than 1.5 per cent above the purchase price.” With the CBN attaching a list of 1588 eligible BDCs to the circular, analysts pointed out that last week’s FX allocation to BDCs could gulp $15.88 million if all the eligible BDCs paid for their dollar allocation.

Declining external reserves

Although analysts project that regular forex sales by the CBN to BDCs will boost liquidity in the retail market, which will lead to an even stronger naira in the short term, this could result in the depletion of the country’s external reserves which recently fell by about $1.02 billion within 18 days. New Telegraph recently reported that after rising steadily from $33.17 billion on February 13, 2024 to hit $34.45 billion on March 18, 2024, Nigeria’s gross external reserves have been heading south since March 19, according to CBN data.

However, Bloomberg recently reported that Nigeria is set to receive a $1.05 billion syndicated loan backed by oil from the African Export-Import Bank (Afreximbank) next month. The news agency said that the loan is part of a larger $3.3 billion prepayment facility arranged by Afreximbank, with repayment terms tied to crude cargoes from the Nigerian National Petroleum Company Ltd.

According to Bloomberg, Afreximbank’s Senior Executive Vice President for Finance, Administration, and Banking, Denys Denya, confirmed the verification of crude availability, paving the way for the final release of the balance within the next month. The news agency stated that the loan is aimed at reviving Nigeria’s economy and enhancing the supply of hard currency in the local foreign exchange market, adding that a substantial portion of it — two-thirds, was already disbursed in January.

Conclusion

Indeed, the consensus among financial experts is that if the CBN succeeds in ensuring that the naira sustains its current momentum, it will also stand a good chance of making progress in its inflation fight.