The Nigerian naira experienced a turbulent week at the official foreign exchange window, depreciating by 1.25% against the US dollar to close at N1536.89/$. The week commenced with the naira trading at N1528.03/$, already weaker than the previous close. Despite brief periods of recovery mid-week, the currency ultimately succumbed to downward pressure, closing the week at its lowest point. This decline coincided with reports of stalled negotiations between the Nigerian National Petroleum Corporation Limited (NNPC) and local refineries regarding a naira-for-crude swap agreement. This agreement allows refineries to pay for crude oil in naira, reducing the demand for dollars in the forex market. The breakdown in negotiations raised concerns about increased dollar demand as refineries would revert to sourcing foreign currency for crude purchases. Adding to the pressure was Dangote Petroleum Refinery’s temporary suspension of naira-denominated sales, citing currency mismatches. This move is expected to further exacerbate dollar demand as marketers scramble to acquire foreign exchange for product purchases.
The Central Bank of Nigeria (CBN) continued its interventions in the foreign exchange market, supplying dollars to banks and Bureaux De Change in an attempt to stabilize the naira. However, analysts caution that these interventions are merely a temporary solution and cannot address the underlying structural deficiencies contributing to Nigeria’s persistent foreign exchange challenges. They argue that sustainable stability requires comprehensive economic reforms that address the root causes of the persistent dollar scarcity. Market observers predict a mixed outlook for the naira in the coming weeks. While CBN interventions are expected to continue, intensifying demand for dollars from businesses and speculative activity could further pressure the local currency. The potential for arbitrage opportunities is likely to fuel further speculative behavior, exacerbating existing pressures on the naira.
In contrast to the official market, the naira fared better in the parallel market, appreciating by 0.77% against the dollar to close at an average of N1568/$. This positive performance was attributed to continued CBN intervention and potentially increased dollar supply from other sources. Analysts suggest that this parallel market stability is largely driven by the CBN’s continued intervention efforts, which are aimed at bridging the gap between the official and parallel market rates and reducing opportunities for arbitrage. The contrasting performance in the two markets underscores the complexities and distortions within Nigeria’s foreign exchange landscape.
Despite the CBN’s efforts, Nigeria’s foreign reserves experienced a marginal decline of 0.06% to $38.35 billion. This decline, albeit small, reflects the continued pressure on the country’s dollar holdings. Analysts attribute the depletion to the central bank’s ongoing interventions in the foreign exchange market, coupled with limited inflows of foreign currency into the economy. The subdued participation of foreign portfolio investors, influenced by concerns over oil receipts amid lower global oil prices, further exacerbates the situation. The dependence on oil revenue for foreign exchange earnings leaves Nigeria vulnerable to fluctuations in global oil markets, underscoring the need for economic diversification.
Global oil market dynamics played a significant role in influencing market sentiment during the week. Brent crude prices rose by 3% to reach approximately $85 per barrel, driven by supply concerns triggered by renewed US sanctions against Iran. The sanctions, aimed at curbing Iran’s nuclear program, have tightened global oil supply, pushing prices upward. Additionally, the OPEC+ alliance reaffirmed its commitment to production cuts until June 2026, aimed at stabilizing the global oil market. This decision, along with news of some member nations exceeding their production quotas, further contributed to supply concerns and the upward pressure on oil prices.
Nigeria, as a major oil producer, is highly susceptible to fluctuations in the global oil market. The recent rise in oil prices, while potentially beneficial for government revenue, also raises concerns about the country’s vulnerability to external shocks. Given Nigeria’s dependence on oil revenue to bolster its foreign reserves, the evolving dynamics in the global oil market will significantly impact foreign exchange inflows and the stability of the naira in the near term. The continued reliance on oil highlights the urgent need for economic diversification and structural reforms to reduce the nation’s vulnerability to external shocks. The interplay of these factors will continue to shape the trajectory of the naira and the broader Nigerian economy in the coming weeks.
