Naira hits 1000/$ as market awaits clues from CBN

…Foreign reserves extend decline to $32.29bn

The naira hit a seven-month high of 1,000 per US dollar at the black market on Tuesday, a remarkable turnaround for a currency that had looked destined to hit 2,000/$ barely two months ago.

Traders reported increased dollar supply on Tuesday and said they expected the currency to strengthen further in the coming days.

Analysts say clues of where the naira is headed in the short-term may lie in the rate at which the Central Bank of Nigeria (CBN) sells dollars to Bureau de Change (BDC) operators during an auction this week.

The CBN last Monday reviewed the exchange rate for BDC operators to N1,101/$ from N1,251/$ the previous week.

The apex bank, which sells $10,000 to each BDC every week, mandated them to only sell at a spread of 1.5 percent, which comes to N1,117 per US dollar.

The rate sold by the BDCs has set a defacto floor for the naira in the black market since the apex bank resumed sales to them in February.

The continued rally in the naira comes after earlier predictions by a Goldman Sachs economist that the naira will likely trade for less than N1,000/$ in coming months.

On the Nigerian Autonomous Foreign Exchange Market (NAFEM), the official window, on Monday, the naira extended its winning streak as it closed at 1,136.04/$, compared to the 1,142.38/$1 on Friday.

In a note to clients last week, analysts at Renaissance Capital Africa said a rating agency is expecting $5-10 billion of portfolio inflows throughout 2024.

After a period of high volatility with significant weakening since last June, the naira has shown some improvement. This stabilisation is due to the actions of the central bank governor, such as raising interest rates to 24.75 percent and managing foreign exchange trades.

Foreign exchange inflows into Nigeria surged to a five-year high in March as investor confidence has improved on the back of the central bank’s reforms.

According to data obtained from FMDQ’s website, total inflows into the NAFEM increased by 41.7 percent to $3.75 billion as against $2.64 billion in February – the highest level since March 2019 ($6.07 billion).

The CBN has also stepped up its intervention in the FX market with sales at both the official market and to BDC operators who sell dollars on the streets.

Naira gains come at a cost

The interventions have come at a cost. The CBN is burning through foreign exchange reserves at a rate not seen in four years, raising concerns that the central bank is depleting its dollar holdings to support the naira after.

The country’s foreign reserves declined 6.2 percent since March 18, when the naira started its rebound from record-low levels against the dollar to $31.29 billion as of Monday, based on the latest available data from the CBN.

It said this is the biggest decline in a similar period since April 2020, according to Bloomberg.

According to the International Monetary Fund, Nigeria’s gross reserves stand at around $32.6 billion and cover about six months’ worth of imports.

The country still has a sizable cushion of foreign exchange reserves, buoyed by a rally in oil prices and inflows from multilateral loans.

Last month, the CBN said it had cleared a backlog of $7 billion since the beginning of the year. That was built over the years as the central bank pegged its currency against the dollar, leading to a scarcity of foreign currency that deterred foreign portfolio investment. However, it’s unclear how much dollar debt the CBN retains on its books.

Akpan Ekpo, a professor of economics and public policy, said the CBN’s managed float system in which it is trying to ensure supply and curtail demand is not sustainable in the long term.

He said the CBN needs to be careful with how it depletes the foreign reserves as its main source is oil revenue.

“We need to manufacture non-oil goods and services, export them, and get foreign exchange and not depend on oil income,” he said.

Charles Robertson, the London-based head of macro strategy at FIM Partners, told Bloomberg that the CBN is trying to attract foreign investors by saving the naira.

“The CBN does appear to be using its FX reserves to clear the valid backlog, and return the naira to a realistic exchange rate,” he said. “My assumption is they hope to encourage others – local and foreign investors – to start investing in the local currency and return private sector liquidity to the foreign exchange market.”