Nigeria’s foreign exchange market remains unstable, according to Fitch Ratings, despite efforts from the Central Bank of Nigeria (CBN) aimed at stabilizing the naira. This assessment diverges from the International Monetary Fund (IMF), which reported that the naira was showing signs of stabilization due to recent interest rate hikes and the CBN’s efforts to clear outstanding foreign exchange obligations. The IMF highlighted the positive effects of policy actions implemented by the Nigerian authorities, crediting the CBN’s initiatives for creating an environment conducive to the currency’s apparent recovery. Consequently, while the naira may be exhibiting signs of recovery, Fitch maintains a cautious outlook on the market’s true stabilization.
Fitch Ratings highlighted several measures being undertaken by the CBN to address liquidity issues in the foreign exchange market, including plans to introduce an electronic FX matching platform set to launch on December 1, 2024. This platform promises to enhance transparency in foreign exchange transactions by offering real-time intra-day pricing. Despite these initiatives and the CBN’s aggressive monetary policy, including raising the monetary policy rate five times by a cumulative 850 basis points to 27.25% since February 2024, Fitch expressed skepticism about the market’s stability. The agency pointed out that the ongoing flexibility of the naira’s exchange rate is still being evaluated, culminating in a statement asserting that the outlook for the FX market remains uncertain.
Although Nigeria’s gross FX reserves saw an increase to $39 billion in mid-October from $32.1 billion in April, Fitch expressed concerns regarding the net reserves position. The growth in reserves was attributed to various factors, including official disbursements, remittances, portfolio inflows, and a favorable trade balance stemming from decreased imports. Nevertheless, Fitch noted that a significant portion of these reserves, estimated at about 25%, is tied up in FX swaps with local banks, contributing to uncertainty in the market. This high level of FX swaps raises questions about the sustainability of the reserves and their ability to support the naira in the long term.
CBN Governor Olayemi Cardoso expressed optimism about the nascent return of confidence in the naira, attributing this to the CBN’s orthodox monetary policies aimed at stabilizing the currency. He emphasized that the CBN’s role was to create an environment that allows the naira to gain trust, noting the importance of market fundamentals in determining the exchange rate. The CBN is committed to ensuring transparency in the FX market and punishing those seeking to exploit it. However, despite Cardoso’s positive outlook and the recent appreciation of the naira observed in early November, the currency continues to face challenges, trading at vulnerable levels above N1,600 against the dollar.
Recent data indicate that the naira experienced slight appreciation against the dollar in both official and parallel markets at the start of November 2024. On November 1, it strengthened to N1,666.72 per dollar from N1,675.49, while the black market rate dropped from N1,750 to N1,735. Despite this temporary relief, the currency’s overall high exchange rate remains a significant issue, affecting businesses throughout Nigeria. A report from Stanbic IBTC Bank revealed that the continued depreciation of the naira is driving up operational costs in the private sector, creating inflationary pressures that escalate prices across goods and services, ultimately leading to a contraction in demand and business activity.
The inflationary strains stemming from a weakening currency were highlighted in the October Purchasing Managers’ Index (PMI) report, indicating a drop to 46.9—its lowest level in 19 months—signaling a sharp decline in business conditions. This downturn was attributed largely to rising input costs driven by the naira’s depreciation, with businesses forced to increase selling prices to offset these expenses. While some firms attempted to maintain workforce levels, many faced difficult decisions, leading to modest job cuts. Stanbic IBTC’s analysis underscores the pervasive challenges facing Nigeria’s economy, particularly in the private sector, amid ongoing currency pressures and high interest rates, which collectively dampen growth prospects.
In response to these challenges, the CBN is set to implement the Electronic Foreign Exchange Matching System (EFEMS) designed to transform the foreign exchange landscape in Nigeria. Scheduled for operation by December 1, 2024, with a trial period in November, the EFEMS aims to modernize transaction handling in the interbank FX market, improve transparency, and promote a market-driven exchange rate that is accessible to all stakeholders. The introduction of this system is a pivotal step toward enhancing the functioning of Nigeria’s foreign exchange market, aiming to ultimately stabilize the naira amidst a continuously fluctuating economic environment.
