Analysts have said the recent stability seen in the foreign exchange market coupled with the appreciation of the naira will moderate the country’s inflation rate, which has surged in recent months.
“The market has moved from high volatility to some level of stability compared to the past,” Umaru Mustapha, research analyst at CSL Stockbrokers Limited, said.
“There should be a reduction in prices, as imported inflation will begin to reduce and will cause inflation to moderate sometime this year,” he said.
After losing 43 percent of its value against the dollar earlier this year, the naira has strengthened by 34 percent since mid-March, the highest gain among global currencies.
The country’s inflation rate quickened further to 33.2 percent in March from 31.7 percent in February.
Last week, the naira appreciated to a seven-month high on the black market, trading for 1,000 against the dollar.
“Companies’ profitability will rebound; we won’t see that significant FX devaluation like we saw last year. So, on a year-year basis, we expect that companies’ profitability will increase, especially in the second quarter,” Mustapha said.
Financial Derivatives Company Limited, in its Economic Bulletin, projected that the continuous appreciation of the naira could ease cost pressures on import-dependent commodities, affecting their pricing dynamics. Lower prices will help improve consumers’ standard of living and increase their disposable income, it said.
Olumide Sole, a research analyst Vetiva, said that Nigeria will likely see a drop in inflation because the cost of production will begin to reduce.
Ayodeji Ebo, managing director at Optimus by Afrinvest, said the price instability over the months has caused lack of confidence in the naira.
“People cannot sell based on today’s exchange rate, because if they sell at today’s exchange of N1,000/$ and it moves to N1,500/$, they will go back to buying at N1,500/$ and this is why prices are not coming down,” he said.
Ebo said that confidence needs to be restored. “There is always a lag in terms of price adjustment; so within the next few months, we see stability in the exchange rate. Then we will begin to see prices adjust.”
On June 14, 2023, the Central Bank of Nigeria (CBN) announced the unification of all segments of the foreign exchange market – replacing the old regime of multiple exchange rates.
It reintroduced the willing buyer, willing seller market model to trading at the Investors and Exporters (I&E) window, in a move towards liberalising the market. The I&E window already had a lower naira rate than the CBN’s official rate.
At the end of the year, the naira plunged 55 percent to 1,043 per dollar on the official market, making it the world’s worst performer after the Lebanese pound and the Argentine peso among 151 currencies, according to Bloomberg. In the black market, the currency closed at 1,208/$.
This year the naira plunged to an all-time low of 1,800/$ on the black market in February.
In its attempt to save the naira, the apex bank under the leadership of Governor Olayemi Cardoso raised interest rates by a combined record 600 basis points in its two meetings in February and March.
The CBN has also stepped up its intervention in the FX market with sales at both the official market and to Bureau de Change operators who sell dollars on the streets.
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