Monday, 09 December 2024 04:40

Naira is appreciating in both official and parallel markets. These are the forces driving the rebound

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The recent appreciation of the Naira in the parallel foreign exchange (FX) market is being attributed to a combination of Central Bank of Nigeria (CBN) interventions, Nigeria’s bond market activities, and other key economic factors, according to analysts.

On Friday, the naira recorded its strongest performance in four months, trading at N1,600 per dollar in the parallel market. This marked a 7.78% improvement from the N1,735/$ exchange rate seen on November 29. This represents a notable recovery from when the naira first crossed the N1,700/$ threshold on September 27. In the weeks following, the naira had fluctuated between N1,670/$ and N1,760/$, reflecting a trend toward greater market transparency and price discovery.

Analysts are optimistic about the naira's future trajectory, with many seeing the currency's recent gains as a sign that the CBN’s foreign exchange policies are taking effect. Charles Abuede, research lead at Cowry Asset Management, highlighted the role of increased crude oil production in boosting Nigeria’s export capacity and foreign exchange inflows, which have helped stabilize the naira. Abuede explained that these inflows have improved liquidity in the FX market, supporting economic activities reliant on dollar availability.

“The recent appreciation of the naira reflects the combined effects of CBN’s monetary interventions and favorable market conditions,” Abuede told TheCable. He emphasized that the rise in oil exports has provided a much-needed cushion for the currency, reducing the pressure it faced earlier in the year.

Muda Yusuf, CEO of the Centre for Private Promotion Enterprise (CPPE), also pointed to the CBN’s strategic interventions in the market, citing the central bank’s sale of FX to Bureau de Change (BDC) operators four times this year to support the naira. Yusuf added that the country’s foreign reserves—now about $40 billion—have improved, aided by increased inflows from international money transfer organizations (IMTOs) and the issuance of both domestic and international bonds. He also cited the successful issuance of a $500 million domestic dollar bond in August and a subsequent $2 billion Eurobond as factors enhancing Nigeria’s FX outlook.

“The outlook for the naira is more positive, with better foreign exchange reserves and improved inflows,” Yusuf said, noting that investor confidence has risen, which also contributes to the currency’s appreciation. He warned, however, that the government's fiscal policy must be carefully managed to avoid undermining these gains.

Looking ahead, Aminu Gwadabe, chairman of the Association of Bureaux De Change Operators of Nigeria (ABCON), forecast that the naira could close the year at N1,500 per dollar. He attributed the naira’s recent strength to increased liquidity from portfolio investors and the positive effects of reforms, such as the transparency in the FX market. Gwadabe also pointed to the rising remittances from IMTOs, which now average around $600 million per month, as another key indicator of market improvement.

Despite these optimistic projections, Gwadabe stressed that a lasting solution for a stronger naira requires greater liquidity at the retail end of the market, where volatility remains prevalent.

Analysis

The recent gains in the naira reflect a combination of short-term factors and longer-term shifts in Nigeria's economic landscape. Key drivers include the CBN’s foreign exchange interventions, increased oil production, and successful bond issuances, which have collectively improved market liquidity and bolstered foreign exchange reserves. The increased inflows from IMTOs and the strong response from portfolio investors further signal growing confidence in the Nigerian economy and its currency.

However, despite the positive outlook, analysts caution that significant risks remain. The most pressing issue is Nigeria's fiscal policy. If the government continues to inject liquidity into the economy unsustainably, these gains could be eroded. Additionally, volatility remains a challenge, especially at the retail end of the FX market, where speculative activity can lead to erratic price movements.

Overall, while the naira's recent performance has sparked optimism, the sustainability of its gains will depend on the continued effectiveness of monetary interventions, fiscal discipline, and the ongoing stabilization of global oil prices. If these factors align, the naira could continue its positive trajectory, potentially reaching N1,500/$ by year-end, as projected by some analysts. However, careful management of economic policies will be critical to avoid setbacks that could undo the progress made.

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