Oil shipments have strengthened the country’s gross external reserves position, and the Nigerian naira has begun to recover from demand shocks that hit foreign exchange (FX) markets.
Last week saw an improvement in exchange rates across the board, with the naira posting gains at both the parallel market and the Nigerian Autonomous Foreign Exchange Market, where local exchange is freely traded against the US dollar.
Analysts observed that the expectation of $10 billion in inflows into the economy in the second half of the year helped to improve the mood of FX users. The Naira rebounded from its peak spot rate of N993 to finish at N776.14 at the official window, according to data from FMDQ, as an unseen hand affected the supply and demand of the US dollar in the market.
According to the MarketForces Africa FX monitor chart, the exchange rate peaked at N1,300 and then increased to N995 in the black market. The expectation of an infusion of $10 billion into the economy, which analysts believe would facilitate the advancement of FX reform, led to an improvement in mood throughout the forex market, which in turn helped the local currency strengthen.
The Nigerian government forced the Central Bank to implement foreign exchange reform in June 2023 by significantly devaluing the naira. The apex bank’s failure to increase the flow of US dollars into the window for investors and exporters, however, resulted in the liberalization losing steam as demand was diverted to the black market.
Recent events in the past weeks have however sent positive signals across the forex market as the authority shifted attention to reflating performance of the naira. Analysts attribute positive exchange rate movement to the CBN’s latest policy drive targeted at ensuring that the local currency is uncaged from US dollar dominance.
As part of the effort to keep the naira stable, the CBN removed restrictions on 43 items from accessing forex from an official window. The CBN also paid about $7 billion to banks to clear forex backlog.
“These decisions are part of big things to come from the monetary authority in the coming out – handwriting is clear this government is seeking to prove a point with economic management”, LSintelligence Associates said. Nigeria’s FX reserve increased for the fourth consecutive week as the gross reserve level advanced by USD60.15 million to close at USD33.40 billion, data from the CBN show.
Analysts said the increase has been supported by a healthy improvement in crude oil production at relatively high prices of oil in the global market. After four months of a sustained uptick, the global crude oil prices cooled off mildly in October, evidenced by the 3.1% month-on-month decline in Brent crude oil price to $90.78 per barrel.
In its market update, Afrinvest said the price moderation was driven by the combined impact of slowing demand from China amid weak economic fortune, higher crude production in the US, and positive progress on diplomatic moves to prevent the Israel-Hamas war from escalating.
This improvement in gross external reserve reflects the anticipated gains from the noticeable increase in Nigeria’s crude oil output in the prior month, according to Afrinvest. The firm said output was up 14.1% to 1.35mbpd in September 2023, the highest in 20 months, supported by the steadiness of global crude oil prices north of $80.00 versus $75.00 set in the 2023 budget.
Due to intermittent demand shock, the naira had run amok in the forex market, trading near N1,000 at the official window while the exchange rate crossed N1300 in the parallel market.
Afrinvest attributed the material devaluation of the Naira in both market segments in the month to the market’s knee-jack reaction to the CBN’s reversal of the ban on 43 items from the official window without an immediate or frontloaded supply boost.
“ we expect FX liquidity conditions to improve slightly, albeit still frail relative to historical standards, as it appears the CBN has regained its momentum regarding FX reforms”, Cordros capital said.
Consequently, if the recent convincing actions by the policymakers to turn the tide are sustained, analysts at Cordros Capital said they expect the local currency pressures to ease.
Cordros Capital expects foreign investors to be keenly watching the development in the FX space with regard to the expected FX inflows as guided by the authorities, CBN’s recent actions in clearing its FX backlogs, and firm direction of short-term interest rates.
