The naira has appreciated to N970 per dollar on the black market as the government’s plans to shore up dollar liquidity in the foreign exchange (FX) market triggered positive sentiments.
Street traders were already buying dollars at the rate of N950 at the weekend, as against N1,130 bought on Thursday last week.
Speculators who have been hoarding dollars for arbitrage are now offloading the same to avoid losing money.
“There are enough dollars in the market now. People are now bringing in dollars. The dollar rate will fall further next week,” Abubakar Ibrahim, a black market operator, said on Friday.
Before now, people were buying dollars ahead for future needs, like education fees for January, but with the government’s efforts to increase dollar liquidity, demand has reduced on the expectation that the rate will drop soon.
There has been a steady rise in foreign exchange (FX) reserves in the last month as the naira strengthened against the dollar, with the Central Bank of Nigeria (CBN) clearing part of the FX backlog, a development seen as restoring confidence in the economy.
Nigeria’s external reserves rose by 0.51 percent to $33.39 billion at the end of October, compared to $33.22 billion recorded at the beginning of the month, according to data from the Central Bank of Nigeria.
The local currency has, in the last few days, appreciated against the dollar, gaining 22.13 percent (N290), as the dollar fell to N1,020 on Friday from the peak of N1,310 on Thursday last week on the black market.
The CBN had said it had started clearing the backlog and delivered on over 75 percent to 80 percent of outstanding matured FX forwards in some specific banks.
“The CBN is clearing only forwards to banks. I understand that it’s done for CITI and two other international banks. I believe that their swap positions with the CBN are much smaller than what they have with the local banks such as Access, Zenith, and UBA, among others,” he said.
The Governor of the Central Bank of Nigeria (CBN), Olayemi Cardoso, has reiterated that under his leadership, the bank will focus mainly on its core mandate of achieving price stability.
“At the end of our tenure, we want to look back and see that our policies have positively impacted people’s lives,” Cardoso said.
Many have been wondering what is driving the positive changes in these key economic indicators. Yemi Kale, partner and chief economist at KPMG Nigeria, attributed it to inflows from oil swap agreements, sales, and loans.
“The government has told us the steps they are taking to improve liquidity. They talked about NNPC, or swap or forward sales, which were to bring about $3 billion; recently, they talked about $10 billion expected into the economy. So, it is possible that some of those things have started to trickle in, and just as they said, their priority is clearing off the backlog in order to begin to restore confidence in the system. I think that is what is happening,” Muda Yusuf, chief executive officer of the Centre for the Promotion of Private Enterprise, said.
He said the government is clearing the FX backlog, and it is already reflecting on liquidity and confidence.
“So, what we need to hope for is sustainability. If they can progressively clear the backlog, that level of confidence will be sustained. If there are expectations that the dollar will continue to go down, then the speculative effect of the demand will also begin to decline, so that those who have money will quickly begin to offload it so that it does not catch on their heads. If people expect that the dollar will go down further, based on what they are seeing, it will continue to go down, so those who are speculating will also begin to offload it so that they do not lose money, and that will continue to improve the liquidity.
Yusuf, however, stated that it depends on how they can sustain the clearing of the backlog. If all the things they said about forward sales and liquidity from the $10 billion begin to happen, we can gradually make some progress in terms of restoring confidence and sustaining stability in the market”, he said.
Wale Edun, Finance Minister, said on October 23, 2023, that Nigeria is expecting as much as $10 billion in new foreign currency inflows in the next few weeks to ease acute dollar shortages in the foreign exchange market.
Okikioluwa Oladipo-Ajilore, global markets associate at Parthian Partners, said, “As of October 2023, Nigeria’s external reserve stood at $33.34 billion, up from $33.25 billion in September 2023. This is not a significant increase; however, we attribute this to the improvement in crude oil prices alongside the volume produced during the period.
“On the back of the CBN clearing the FX backlogs, we have witnessed an appreciation in the naira due to improved dollar supply in the system. Though this backlog has not been fully cleared, we hold that its sustainability would be a factor in whether this recent trajectory of inflows from FPIs and other actions that have grown the optimism in the space are maintained.”
According to Charlie Robertson, head of macro strategy at FIM Partners UK Ltd, “economists have been saying for years that a cheap naira would improve the balance of payments, and since June we’ve had a cheap naira.”
He said it wasn’t enough to stabilize the naira immediately because of the overhang of past debts incurred by the CBN and because interest rates were too low. The authorities are addressing both points. “My view is that the naira fair value today is at 780/$ and will be at 950/$ at the end of 2024, so the BDC rate can appreciate substantially from here,” he said.
