Nigeria’s naira has plummeted to a four-month low despite efforts made by the Central Bank of Nigeria to make it rebound, including raising interest rates for the fourth straight meetings this year.
The naira closed at 1,603.80 to the dollar on Thursday at the Nigeria Autonomous Foreign Exchange Market (NAFEM), its lowest level since March 14.
This is even as foreign exchange market liquidity fell 23 percent from the day before to $131 million.
The local currency sold between N1,650 and N1,680 on the street popularly known as black market.
The free fall of the naira has made it the second worst performing currency in the world in 2024 — downgrading it from its best-performing position earlier this year, according to Bloomberg.
The CBN has continued to roll up its sleeves to shore the naira up by selling the sum of $122.67 million to 46 authorised dealers to promote stability and reduce market volatility.
The monetary policy committee hiked interest rates by a combined 800 basis points to 26.75 percent on Tuesday to tame the stubbornly high inflation and strengthen the naira.
But the naira remains weak even as the external reserves, which gives the currency firepower, rose to a 17-month high of $37.05 billion in July 2024.
The last time Nigeria had reserves slightly above $37 billion was February 2023, exactly 17 months ago, according to the Central Bank of Nigeria (CBN) data.
Weakening naira raises inflation risk for the central bank as it continues to deploy various monetary tightening policies to ramp up liquidity while maintaining its hawkish stance.
Bismarck Rewane, managing director/CEO of Financial Derivatives Company Limited said borrowing from the CBN to purchase foreign exchange (FX) was part of what intensified pressure on the Naira and inflation.
Rewane highlighted that the CBN’s recent decision to adjust the asymmetric corridor around the Monetary Policy Rate (MPR) to +500/-100 basis points after a two-day Monetary Policy Committee (MPC) meeting would significantly impact borrowing costs.
“Before now, banks were borrowing at about 26 percent. As of today, they will be borrowing at almost 32 percent,” Rewane said.
“That difference of almost 5 to 6 percent means that the cost of borrowing from the CBN to buy FX has gone up astronomically. This increase acts as a deterrent to borrowing from the Central Bank to buy FX and should reduce the pressure on the Naira. It’s all meant to make things much easier.”
The financial expert however projected that the naira will make a rebound by September as consolidations from the high lending rate.
“Higher interest rates will increase savings and help moderate inflation, the naira will recover from N1700 to N1500 in September,” Rewane said.
