Nigeria’s FX market yet to stabilise despite CBN’s efforts – Fitch

Nigeria’s foreign exchange market is yet to bounce back despite various interventions by the Central Bank of Nigeria (CBN), according to Fitch’s Rating, a global credit rating agency.

The U.S-based capital market firm in its latest rating of Nigeria suggests a more cautious outlook as the exchange rate has yet to stem the tide of its tumultuous fall.

“The Central Bank of Nigeria is initiating several measures to address FX liquidity challenges and formalise FX activity to support the currency. These include plans to introduce an electronic FX matching platform for all FX transactions effective December 1, 2024, to provide intra-day prices in real-time and enhance transparency,” it said.

“The CBN has also raised the monetary policy rate five times by a cumulative 850bp to 27.25 per cent since February 2024. However, Fitch believes that the FX market has yet to stabilise, and the ongoing flexibility of the exchange rate remains to be tested,” Fitch stated.

Fitch further disclosed that there’s been an increase in Nigeria’s gross FX reserves, surging to $39 billion in mid-October from a low of $32.1 billion in mid-April.

It attributed this rise to official disbursements, remittances, portfolio inflows, and an improved trade balance, the latter boosted by lower imports amid higher domestic refining production and the dampening effect of currency depreciation on local demand.

“We forecast FX reserves to rise to 6.1 months of current external payments at end-2024 (‘B’ median 3.7) and to average 5.3 months in 2025-26,” Fitch added.

However, the agency expressed caution regarding the true net reserves position, estimating that about a quarter of current gross reserves are FX swaps with local banks.

Nigeria’s CBN Governor Olayemi Cardoso has recently said the confidence in the naira is “gradually returning”, noting that the apex bank is focused on ensuring stability and cooling prices.

Speaking at the World Bank’s launch of the Nigeria Development last month, Cardoso said, “The confidence in the naira is gradually returning as a result of the policies that we are already undertaking, which goes back to the whole issue of Orthodox monetary policy, that is really what begins to encourage people to hold onto naira.”

However, despite the policy steps taken by the Cardoso-led CBN, challenges still persist in the market, with the naira trading above N1,600.

The Nigerian naira which has so far been adjudged as one of the worst performing currencies in the world appreciated against the dollar at the official and parallel markets to begin November 2024 on a positive ride.

Data from FMDQ securities showed that the naira strengthened to N1,666.72 per dollar on Friday, November 1, from N1,675.49 quoted on Thursday, October 31, indicating that the local unit gained N8.77 against the dollar to close the week.

This is even as the naira gained N15 on the street to close at N1,735 against the dollar on Friday compared to N1,750 on Thursday.

Despite the appreciation at the beginning of the month, the high exchange rate remains a challenge that’s crippling businesses and forcing them out of operations.

According to the latest Purchasing Managers’ Index report by Stanbic IBTC Bank Nigeria, the Nigerian private sector faces intensifying challenges as the weakening naira continues to drive up purchase costs.

“A steep increase in purchase costs reflected currency weakness and higher prices for fuel and transportation.”

The report reveals that inflationary pressures have surged, with input costs rising at one of the sharpest rates recorded, leading to higher prices for goods and services and a resulting contraction in demand and business activity.

In October, the PMI dropped to 46.9, a 19-month low, indicating a marked deterioration in business conditions compared to September’s reading of 49.8.

A reading below 50 signals a decline in the sector’s performance. The report attributes this downturn largely to currency depreciation, which has compounded the costs of fuel, transportation, and other essential imports.

Companies have had to raise their selling prices sharply to offset these input costs, marking the fourth-highest rate of charge inflation on record.

The increase in operational costs has also impacted workers, as businesses have raised wages to counter rising living expenses, leading to the largest increase in staff pay in seven months.

Despite shrinking new orders, firms marginally increased staffing levels, continuing a six-month trend in job creation.

However, these adjustments were modest, as some companies opted to reduce their workforce in response to financial pressures.

Weakening demand has also prompted businesses to scale back on purchasing activities, marking the steepest reduction in input buying since March 2023.

BusinessDay reported that not less than 70 companies have exited Nigeria in the last seven years as volatility in exchange rate shrinks their earnings and uncertainties fraught their business operations.