The Nigerian naira, demonstrating remarkable resilience, maintains its upward trajectory in the forex market, heading to beat the N1,000/$1 threshold. The currency traded at an impressive N1,120 against the dollar in the parallel market following the recent three-day Eid holidays.
With this steadfast rally, the naira has emerged as the world’s top-performing currency this month, according to a Goldman Sachs Group Inc. economist.
After weathering a storm of significant depreciation, the naira gained a noteworthy 12% appreciation against the dollar in April, complementing the modest 1% increase observed in March. This rebound marks a stark departure from the currency’s tumultuous past, characterized by a daunting 71% loss in value due to successive devaluations initiated after the relaxation of currency controls in June.
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The recent rally propelling the naira to a notable recovery from its record low of N1,627/$1 on March 8, has forced Goldman Sachs to revise its earlier forecast predicting the naira to strengthen to 1,200 per dollar by 2024. Given the recent momentum, the financial giant said there is now the potential for the currency to reach or even surpass this level sooner than initially anticipated.
A Goldman Sachs Group Inc. economist suggests that the naira may continue to make gains in the official market in the coming days, provided policymakers remain consistent with their strategies, according to a Bloomberg report.
The gains are attributed to President Bola Tinubu’s economic reforms, which have seen the central bank roll out a flurry of policies targeted at taming economic headwinds.
Under the leadership of Governor Olayemi Cardoso, the Central Bank of Nigeria (CBN) has implemented decisive measures to stabilize and fortify the naira. These actions include substantial interest rate hikes designed to attract foreign investment and alleviate the local dollar shortage that had exacerbated the currency’s instability.
Nigeria is currently grappling with a spike in inflation, which soared to a 28-year high at 31.7%, posing a formidable obstacle to sustained economic growth and compounding the cost-of-living crisis gripping the country.
How long will the liquidity last?
The central bank’s latest push to boost the naira came last week, when it issued a circular to Bureau De Change operators (BDCs), announcing the sale of $10,000 to each BDC at a rate of N1,101/$1. The BDCs are mandated to sell the allocated dollars to eligible customers at a rate not exceeding 1.5% above the purchase price. This implies that BDCs are expected to sell dollars at a rate below N1,117/$1.
The decision to resume forex sales to BDCs reflects the CBN’s renewed emphasis on improving liquidity in the retail segment of the forex market. Previously, the prohibition of forex sales to operators stemmed from concerns about potential price arbitrage, particularly during the tenure of former CBN governor Godwin Emefiele, when the exchange rate was fixed.
With the transition to a “market-determined” exchange rate regime, the central bank is confident that Bureau De Change operators no longer have the motivation to participate in arbitrage. Previously, concerns arose from the possibility of operators purchasing currency at lower rates from the CBN and then selling it at higher rates in the parallel market.
Despite the positive impacts of recent policies on the naira’s performance, concerns persist about its long-term sustainability. Recent findings reveal that Nigeria’s foreign reserves have decreased from $34.45 billion to $33.34 billion within just 18 days. Analysts attribute this sharp decline of $1.02 billion to the Central Bank’s vigorous efforts to defend the naira against the dollar.
The decline in Nigeria’s foreign reserves marks a significant departure from a period of consistent growth. Over 43 days between February 5 and March 18, 2024, the reserve experienced steady expansion, increasing by an additional $1.28 billion.
According to the latest data from the CBN, the FX reserves stood at $33.43 billion as of April 4, down from $34.45 billion on March 18.
Economists warn that the drawdown in Nigeria’s foreign reserves could have adverse implications for the country’s currency unless accompanied by measures to bolster fiscal policies. They suggest that improving exports, enhancing domestic petroleum refining capacity, combating oil theft, increasing capital importation, and encouraging diaspora remittances are essential steps to strengthen the economy and stabilize the naira.
“I am saying correctly that unless crude oil exports rise, the naira can’t sustain its rise long-term without the CBN selling its reserve,” an economist, Kalu Aja, said.
He added: “The real fundamentals are unchanged. The oil revenue, which makes up 89 per cent of forex earnings, still has huge impact on the foreign reserve. What the CBN has done is buy time for the executive to pump more oil; if that oil output changes, then the fundamentals have changed, and the dollar pressure will ease to a new level.”