Fresh Pressure Mounts On Naira

Fresh Pressure Mounts On Naira

Demand on the naira is set to increase with forward futures amounting to circa $1.3 billion will be due by the end of this month, further setting the value of the naira back. The naira has in recent weeks reversed its gains which made it one of the best performing currencies last month.

Last week, Bloomberg had reported that the reversal of the gains made by the naira had pushed it to the bottom of the barrel making it the worst performing currency.  This is coming less than one month after the Governor of the Central Bank of Nigeria announced that the naira has emerged the best performing currency at the 2024 spring meetings of the IMF/ World Bank.

The naira within a month had moved from being best performing to one of the worst performing currencies in the world according to a Bloomberg report. Having moved from N2,000 to the dollar earlier this year to N1,000 last month, the naira had reversed closing at N1,466.31 to the dollar.

Trading at the Nigeria Autonomous Foreign Exchange Market (NAFEM) had seen some trade consummated at between N1,322 and N1,490 to the dollar last week Friday as turnover halved from the day before to just $84 million.

Chief Economist for Africa and the Middle East at Standard Chartered, Razia Khan, estimates that $1.3 billion in naira futures will mature at the end of this month, weighing on market sentiment, adding that the “belief is that this will create more demand for dollars.

“When the currency appreciated very fast, there had been a bout of profit taking by offshore investors, and this meant that dollar-naira exchange rate backed up again. This is completely in line with the functioning market,” Khan said.

 

To Senior Economist for South Africa and sub-Saharan Africa at Deutsche Bank, Danelee Masia, naira appreciation has stalled in the face of sluggish demand from international investors for local assets amid concerns over dwindling reserves.

 

“We think the naira is likely to be vulnerable to stronger seasonal FX demand” for dollars. Forex demand tends to go up in Nigeria in Q3 and Q4, driven by stronger corporate demand ahead of the holiday season,” she said.

 

On Friday, the naira dropped to its lowest level in a month, reaching N1,470 to the dollar on the black market due to a scarcity of dollars and speculative trading. This decline was driven by heightened demand for dollars, particularly for purposes like education, healthcare, and tourism.

 

The recent drop marks another period of instability following President Bola Ahmed Tinubu’s decision to ease foreign exchange restrictions in June. Since then, the currency has lost approximately 68 per cent of its value against the US dollar. Khan noted that this recent fluctuation indicates a shift towards allowing market forces to dictate currency values.

 

The decline in the naira’s value is expected to increase pressure on the Central Bank of Nigeria to raise rates once more after its upcoming policy meeting on May 21. In February and March, the bank raised rates by a total of 600 basis points, which helped the naira recover from a low of N1,627 on March 8 to N1,072 by mid-April, as investors were drawn to higher-yielding local assets.

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