• Thursday, April 18, 2024
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BusinessDay

Rare rates convergence, higher FX reserves give hope for a stronger Naira

Naira nears 1,000/$ on black market

A rise in foreign reserves to $34.37bn and a rare convergence in the official and blackmarket rates of the local currency is giving people in Nigeria hope of a stronger Naira after a tumultuous three months that brought pain and misery.

The official and parallel-market exchange rates for the naira have converged in recent days as capital inflows surged, giving credence to a forecast by Goldman Sachs Group that the Nigerian currency will strengthen over coming months.

The naira was traded at 1,609 per dollar on the official market on Thursday, according to Lagos-based FMDQ, which tracks the data, almost in line with parallel-market rate of 1,610.

The official rate has been within 3% either side of the parallel-market rate since last week, compared with a spread of more than 30% in January, before the central bank introduced measures to improve dollar liquidity.

The current convergence in the two rates is the longest streak since the nation initiated foreign exchange market reforms in June.

And data from the Central Bank of Nigeria showed that the foreign reserves increased by 3.62% to $34.37bn as of March 12, up from $33.17bn recorded at the beginning of February 2024.

Africa’s most populous nation first implemented measures in June to attract inflows, effectively devaluing the naira and pushing the official and unofficial-market rates closer together for a brief period. It allowed the local currency to weaken again in January.

A jumbo interest rate hike last month helped stabilize the naira.

Data on Friday showed that inflation accelerated to 31.70% in February, according to Nigeria’s Bureau of Statistics and this raised suggestions the central bank may be prompted to keep raising borrowing costs.

The measures are starting to pay off, with overseas remittances rising more than fourfold to $1.3 billion in February from a month earlier, according to Hakama Sidi Ali, a spokeswoman for the central bank.

Foreign-investor portfolio asset purchases exceeded $1 billion in February, bringing total inflows this year to at least $2.3 billion, compared with $3.9 billion for the whole of 2023, Ali said last week.

The nation’s foreign-exchange reserves at $34.37 billion are the highest since June 21, according to central bank data.

If the the central bank continues to raise interest rates, the naira could strengthen from here, according to Goldman Sachs.

“When it comes to the metrics of value, carry and real rates,” Nigeria’s naira is now one of the “more attractive frontier currencies, with recent rate increases,” Goldman Sachs analysts including Kamakshya Trivedi and Caesar Maasry wrote in a note. They see the naira appreciating to 1,200 per dollar in the next year.