• Wednesday, July 24, 2024
businessday logo

BusinessDay

Naira stability linked to low dollar demand, rising inflows

Naira under pressure as MPC convenes for a likely rate hike

The Naira has shown stability over the past month, trading between N1,476 and N1,485 against the dollar in the official foreign exchange market, but sustainability remains a concern.

On Friday, the Naira ended the trading week at N1,485.53 per dollar, unchanged from Thursday’s closing of N1,485.36. Earlier in the week, the dollar rates were as follows: N1,476.12 on June 3, N1,476.95 on June 4, N1,488.60 on June 5, N1,481.49 on June 6, and N1,483.99 on June 7, data from the FMDQ Securities Exchange Limited showed.

“There is usually a level for a currency that is too cheap, which means it cannot get markedly weaker for any length of time (unless inflation is out of control). This is true for the naira today. It is so cheap the current account is probably in surplus every month. That then provides the support to stabilise the currency,” said, Charlie Robertson, head of Macro Strategy FIM Partners UK Ltd.

The naira stability has been attributed to low demand and increased dollar inflows, which have helped to strengthen the external reserves.

Within a month, about $5.95 billion from the World Bank and Afreximbank entered into the Nigerian economy, helping to strengthen Nigeria’s external reserves and the value of the naira.

Nigeria’s external reserves have increased by 2.81 percent month-on-month to $33.640 billion as of June 20, 2024 compared to $32.720 billion recorded in May 20, 2024, according to data from the Central Bank of Nigeria (CBN).

“I reckon that what is happening at the FX market is a reduction in demand largely because the market expects the naira to appreciate in the short term before it begins to make its demands. So, demand is slowing down and it’s reflecting on the price of the currency,” Tajudeen Ibrahim, director research and strategy ChapelHill Denham, said.

Ayo Teriba, CEO of Economic Associates, stated, “We’ve seen stability before in April, after the second tightening with the naira being the best performing currency in the world and quickly becoming the worst performing currency.”

He added, “We are looking for stability for more than a month,” Teriba noted, adding that “it remains to be seen if the stability will be sustained and one can link the stability to the reserves because they have also been stable.”

He said Nigeria has to dwell on building reserves beyond the level where the market will be volatile, noting that the level of reserves “we are currently holding for an economy of our size is not adequate.”

Aminu Gwadabe, president of the Association of Bureau De Change Operations of Nigeria (ABCON), said: “Our output as a nation has drastically reduced. The exit of multinational companies suggest a lack of confidence in the economy. Inflation, interest rates are all heading southwards.”

He noted that the recent stability is a welcome development but temporary as all the indices are not in the country’s favour.

Olayemi Cardoso, governor of the CBN, on Friday said that despite current drawbacks, the bank has consistently improved foreign exchange (FX) supply while protecting the interests of all parties.

In addition, he stressed the importance of restoring confidence and trust in the Nigerian economy for all investors – local and foreign.

The CBN under Cardoso has increased the Monetary Policy Rate (MPR), also known as benchmark interest rates, by 750 basis points to 26.25 percent in May 2024 from 18.5 percent in July 2023. The increases are targeted at reining in rising inflationary pressure.

Lamido Abubakar Yuguda, member of the Monetary Policy Committee (MPC), said fighting inflation remains the key to achieving other macroeconomic objectives.

“Inflation remains a major challenge for the economy as it is still way above the threshold, and our instruments must be deployed to counter the trend, to promote growth in the economy,” he said.