The Nigerian naira experienced a setback in its recent positive trajectory, depreciating against the US dollar across both official and parallel markets. This reversal occurred despite earlier gains and positive projections for the currency’s performance in March. The week concluded with the naira weakening by 1.66%, closing at 1,517.24/$ compared to the previous week’s 1,492.49/$. The parallel market mirrored this trend, with the naira falling to an average of 1,520/$, and some Bureau De Change operators reporting rates as high as 1,570/$, a significant N70 drop. This depreciation comes after a strong February performance where the naira appreciated by 8.5% month-on-month on the parallel market, closing at 1,490/$, and experiencing a more modest 1.7% decline on the official market to close at 1,500/$. Analysts had initially foreseen a continued positive trend for the naira in March, assuming no unforeseen market disruptions.
Several financial analysts attribute the naira’s depreciation to a confluence of factors. AIICO Capital Limited highlighted increased demand for dollars from both foreign portfolio investors and local corporations as a primary driver. This surge in demand, coupled with tight dollar liquidity, has exerted pressure on the naira despite interventions by the Central Bank of Nigeria (CBN). CardinalStone echoed this sentiment, noting that profit-taking by foreign portfolio investors and local corporates offset the support provided by the CBN’s interventions in the interbank market. Essentially, the outflow of dollars due to these market activities surpassed the inflow generated by the CBN’s efforts to stabilize the currency.
The CBN’s ongoing weekly interventions in the foreign exchange market are considered a critical factor in determining the naira’s future trajectory. Analysts at Cowry Assets Management Limited emphasize the importance of these interventions, suggesting that the CBN’s actions will heavily influence currency movements. However, with foreign reserves at $38.35 billion, the CBN is believed to possess sufficient resources to act as a buffer for the naira, potentially mitigating further significant depreciation. This considerable reserve offers a degree of reassurance regarding the CBN’s ability to manage the current pressures on the currency.
Looking ahead, analysts maintain a cautiously optimistic outlook for the naira, conditional on the absence of major market shocks. Short-term projections anticipate moderate market performance, with the potential for an improved dollar supply to provide some relief for the local currency. Afrinvest, in its Monthly Market Report, aligns with this projection, anticipating that the naira will sustain its positive performance across various foreign exchange segments throughout March. This positive outlook hinges on the CBN’s continued dollar supply to Bureaux De Change (BDCs) and Deposit Money Banks (DMBs), assuming no unexpected market disruptions. These interventions are crucial for maintaining liquidity and stability in the foreign exchange market.
Despite the recent setback, the medium-term outlook remains positive, provided the CBN continues its interventionist policies and no significant external shocks occur. The expectation is that the increased dollar supply facilitated by the CBN will help stabilize the naira and potentially lead to further appreciation. However, underlying challenges remain, including Nigeria’s mounting debt burden, the persistent decline in foreign reserves, and high inflation rates. These issues could undermine the positive effects of the ongoing foreign exchange reforms and pose a threat to long-term currency stability.
In conclusion, the naira’s recent depreciation is attributed to a surge in dollar demand from foreign investors and local corporations, outpacing the impact of CBN interventions. While the CBN’s substantial reserves offer a cushion against further significant decline, and analysts maintain a cautiously optimistic outlook for the near future, underlying economic challenges, such as rising debt and inflation, continue to pose a threat to the naira’s long-term stability. The CBN’s ongoing interventions and the absence of external shocks are crucial for the naira to maintain its positive trajectory. Continuous monitoring of these factors and proactive measures by the CBN will be essential for navigating the challenges and ensuring the naira’s stability and potential for future appreciation.
