Naira ends 2024 with 40.9% loss amid external reserves growth

…External reserves up 24.2% in one year

… Tinubu says naira has strengthened against dollar

The naira, which has in recent times experienced stability, concluded 2024 with significant depreciation across foreign exchange (FX) markets, recording a 40.9 percent loss against the dollar in the official market despite notable growth in external reserves.

This sharp decline highlights ongoing challenges in Nigeria’s currency market in the just concluded year despite efforts to stabilise the economy.

President Bola Ahmed Tinubu, however, maintained a positive outlook, emphasising the strides made in economic stability. In his New Year message, he stated, “Economic indicators point to a positive and encouraging outlook for our nation. Fuel prices have gradually decreased, foreign trade surpluses have been recorded for three consecutive quarters, foreign reserves have risen, and the naira has strengthened against the US dollar, bringing greater stability to the economy.”

Data from the Central Bank of Nigeria (CBN) reveals a contrasting reality, with the dollar quoted at N1,535 on December 31, 2024, the last trading day of the year in the Nigerian Foreign Exchange Market (NFEM). This marks a steep drop from N997 per dollar on December 31, 2023, in what was then known as the Nigerian Autonomous Foreign Exchange Market (NAFEM). The decline of N628 within a year underscores a significant 40.9 percent depreciation in the naira’s value during 2024. Moreover, the 12-month trajectory shows a 35.6 percent decline from N988.46 per dollar on January 2, 2024, to N1,535 by the year’s end.

The parallel market mirrored this downward trend. By December 31, 2024, the dollar was trading at an average of N1,656, compared to N1,164 at the end of 2023, representing a 29.7 percent depreciation in the black market.

Analysts attribute the naira’s decline to heightened demand for dollars to meet both visible and invisible needs, such as imports, school fees, and medical expenses, alongside speculative activities.

Paradoxically, the depreciation occurred against the backdrop of increased external reserves and foreign exchange inflows. According to CBN data, Nigeria’s external reserves surged to $40.88 billion as of December 30, 2024, up from $32.91 billion at the end of 2023, reflecting a 24.2 percent increase.

The CBN’s October 2024 monthly economic report highlights that capital inflows significantly rose, driven primarily by portfolio investments. Inflows jumped to $1.89 billion in October, up from $0.40 billion in September, with portfolio investments soaring by 403.57 percent to $1.41 billion due to heightened interest in equity and money market instruments. Foreign direct investments also grew substantially, rising by 350 percent to $0.18 billion, while loans classified as “other investments” increased by 275 percent to $0.30 billion.

The FSDH’s macroeconomic report for the third quarter of 2024 further underscores improvements in trade and Forex inflows. It noted a trade surplus of $8.9 billion in the first half of 2024, a 45.2 percent increase compared to the second half of 2023. High-interest rates have attracted more portfolio investments, contributing to the accumulation of reserves. Despite these positive developments, the naira remains under pressure due to relentless demand in the FX market.

Olayemi Cardoso, governor of the CBN explained that significant reforms had been implemented to unify Nigeria’s exchange rate system, aiming to eliminate distortions and restore market transparency. “Over the past year, we have undertaken critical reforms to unify Nigeria’s exchange rate, eliminating distortions and restoring transparency,” Cardoso said. “This unification has enabled us to clear outstanding foreign exchange obligations, giving businesses—from manufacturers to airlines—the confidence to plan and invest in the future.” He also announced the upcoming introduction of an electronic FX matching system designed to enhance price discovery and improve market stability. This system has proven effective in other markets and is expected to address inefficiencies in Nigeria’s FX market.

In his November 2024 speech, Cardoso cautioned against misinformation about a supposed demand-supply gap in the FX market, which he argued was exacerbating panic. “The current USD exchange rate reflects the price that the most desperate buyers are willing to pay, and this does not represent the true market value of the naira,” he said. The electronic matching system, he noted, would correct distortions, enhance price discovery, and strengthen the Central Bank’s oversight capabilities, ensuring a more transparent and stable foreign exchange market.