… Dollar demand declines as invisible transactions drop
Nigeria’s currency has appreciated by N125 to a dollar one month after the launch of the Electronic Foreign Exchange Matching System (EFEMS).
Analysts say this may be an indication that the naira’s rebound journey has just started, noting that the local curerency will have a positive run in 2025.
According to the Central Bank of Nigeria (CBN), the naira strengthened by 8 percent as the dollar was quoted at N1, 535 on January 3, 2025, as against N1,660 traded on December 2, 2024, the official launch date of EFEMS trading, indicating a N125 gain over the period.
The introduction of EFEMS was first announced by the CBN on October 3, 2024, as part of a series of reforms aimed at addressing speculation and enhancing transparency in Nigeria’s foreign exchange market. This system was specifically designed for authorised dealers operating within the Nigerian Foreign Exchange Market (NFEM) and became operational on December 2, 2024, after a successful two-week trial period conducted in November 2024.
Cardoso’s Take
Olayemi Cardoso, governor of the CBN, highlighted the significance of this reform, stating, “Over the past year, we have undertaken critical reforms to unify Nigeria’s exchange rate, eliminating distortions and restoring transparency. This unification has enabled us to clear the outstanding foreign exchange obligations, giving businesses—ranging from manufacturers to airlines—the confidence to plan and invest in the future. To further enhance the functionality of the foreign exchange market, we are introducing an electronic FX matching system, which has proven effective in other markets.”
EFEMS’ Positives
Ayodele Akinwunmi, who serves as a senior relationship manager at FSDH Merchant Bank, attributed the recent improvements in the foreign exchange market to the CBN’s latest policy measures.
He emphasised that these policies have significantly enhanced both the supply of foreign exchange and the transparency of market operations. According to him, customers are now able to access foreign exchange more readily to meet their financial obligations, and the prevailing exchange rates are better aligned with market realities.
Akinwunmi also highlighted how seasonal factors, particularly the typically lower demand for dollars during the Christmas holiday period, have played a role in bolstering the naira’s value during this time.
Similarly, Aminu Gwadabe, president of the Association of Bureaux De Change Operators of Nigeria (ABCON), underscored the critical role of the CBN’s interventions in the EFEMS in influencing the naira’s appreciation. He emphasised the need to further enhance liquidity in the retail foreign exchange market, particularly through the involvement of Bureaux De Change (BDCs).
Gwadabe proposed that BDCs be utilised as strategic instruments to manage exchange rate volatility effectively and to help achieve the exchange rate targets set in the national budget. He expressed confidence that a more robust engagement of BDCs in the market could contribute to greater stability and predictability in exchange rates.
EFEMS’ challenges remain
While EFEMS has delivered promising results, industry experts stress that challenges remain.
Muda Yusuf, chief executive of the Centre for the Promotion of Private Enterprise (CPPE), acknowledged the CBN’s progress in stabilising the foreign exchange market but pointed out that the unregulated black market continues to pose significant hurdles.
“The measures taken by the CBN are yielding some positive results, but it is a work in progress,” Yusuf explained. “Speculators and manipulators in the market are constantly devising new tricks, so this must be a continuous effort.”
The naira’s recent appreciation comes after a turbulent year marked by significant instability. In 2024, the currency experienced a sharp depreciation, losing 40.9 percent of its value against the dollar in the official market, despite an increase in external reserves. This decline underscores the persistent challenges facing Nigeria’s currency market, even amid efforts to stabilise the economy.
The EFEMS initiative, while still in its early stages, represents a critical step towards addressing these challenges, analysts say.
Read also: The naira’s decline: A symptom of deeper economic failures
Dollar demand declines
Meanwhile, the dollar demand by various sectors of the Nigerian economy, also referred to as foreign exchange (FX) utilisation, fell by 11 percent to $5.7 billion in the third quarter (Q3) of 2024 from $6.4 billion in the second quarter (Q2) of the same year, primarily driven by a reduction in invisible transactions.
This marks a notable decline from the previous quarter, as FX usage for non-physical transactions, which include services such as travel, insurance, and remittances, saw a sharp drop of 32 percent, falling to $2.2 billion in Q3 of 2024 from $3.3 billion in Q2 of 2024.
According to data from the CBN Quarterly Statistical Bulletin compiled by FBNQuest, invisible transactions now account for approximately 39 percent of total FX utilisation, down from 51 percent in Q2 2024. The financial sector, which has historically been a dominant consumer of foreign exchange in this category, was the key driver behind the steep quarterly decline.
The FX consumption by the financial services sector dropped by 34 percent quarter-on-quarter (q/q), reaching nearly $2.0 billion ($1.99bn) in Q3 2024 compared to $3.03 billion in Q2, 2023.
On the other hand, foreign exchange demand for merchandise imports saw a modest increase of 10.4 percent q/q, rising to $3.45 billion in Q3, 2024 from $3.12 billion in Q2, 2024. This uptick in demand for physical goods brought the share of merchandise imports in total FX utilisation to about 61 percent, up from 49 percent in the previous quarter. Within this category, the industrial sector emerged as the largest consumer, accounting for roughly 53 percent of the total forex used for imported raw materials, machinery, and equipment. Additionally, forex demand for food products— the second-largest category in merchandise goods—rose by 16 percent quarter-on-quarter to $633.6 million in Q3 2024 from $547.7 million in Q2 2024.
Overall, the trend in FX utilisation has shown a decline since the first quarter of 2023, largely due to decreased demand following the substantial devaluation of the Naira. However, with the CBN’s continued efforts to enhance FX liquidity and improve access to foreign currency, it is expected that demand for dollars will see a modest rebound in the coming months. The CBN’s ongoing measures, including streamlining FX trading and boosting market transparency, are anticipated to ease pressure on the foreign exchange market and facilitate more stable access to foreign currency across various sectors of the economy.
Naira Rebound in 2025
Zeal Akaraiwe, CEO at Graeme Blaque Advisory, in an interview with BusinessDay, said 2025 could be a turning point for the naira.
“Personally, I maintain an optimistic outlook on the naira’s trajectory and believe the year could mark a significant turning point, reversing many of the challenges that have weighed on the currency in recent years,” Akaraiwe said.
He said the optimism is underpinned by notable improvements in Nigeria’s macroeconomic environment.
According to Uche Uwaleke, director of the Institute of Capital Market Studies at Nasarawa State University, “With increased domestic refining capacity, we expect a significant decline in fuel imports, which will ease pressure on foreign exchange demand and strengthen the naira.”
He further highlighted the potential impact of increased earnings from the export of petroleum products.
“As Nigeria boosts its export capacity, foreign exchange inflows will improve, supporting the local currency,” Uwaleke further said.
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