Naira Surges As Tenacious CBN Flood Banks, BDCs With FX

Federation Account Amasses Over ₦5trn In 6months- RMAFC

The Nigerian naira has remained strong on foreign exchange markets due in part to the foreign currency injections given by the apex bank to deposit money banks and bureaux de change (BDCs) as part of its determination to stabilize and unify exchange rates.

The naira was under pressure early in the year due to a dearth of US dollar inflows into the market. Currency speculators’ activity and issues with foreign exchange inflows caused exchange rates to plummet sharply, with the spot FX rate standing at N1900 to the US dollar.

The monetary authority’s move to keep a close regulatory eye on exchange rates in these markets is said to have contributed to the recent increase in the value of the local currency in relation to the US dollar.

As stated to information from FMDQ Securities Exchange, the Naira appreciated by 1.64%, closing at ₦1,408.04 per US dollar. In the parallel market, the Naira closed at ₦1,400 amidst forex injections at a lower spot rate.

In its macro update, multi-asset investment banking firm, CardinalStone Partners Limited, said the payments of FX backlogs and improving carry trade opportunities are piquing investors’ interest. The firm said the cumulative foreign inflows since the beginning of the year are estimated at $2.1 billion, compared to $1.6 billion in 2023.

The amount of inflow, according to experts, is consistent with Nigeria’s robust carry trade relative to other major African countries, which is bolstered by the hawkish monetary policy of the nation and the relative stability of the Naira, as demonstrated by the 12-month currency forward.

Market data cited by analysts suggest that daily FX turnover—a measure of liquidity—has surged to a year-to-date average of $4.3 billion compared to $2.3 billion in 2023. This notable improvement ties finely with the mentioned inflows of foreign capital and improved intervention by the apex bank in segments of the currency market, analysts stated.

CardinalStone reports that the CBN has stepped up efforts to boost investor relations and restore market trust, both of which have been beneficial for Nigeria’s investment case. As a result of the market frameworks being restructured, hawkish rendition becoming more intense, and all legal outstanding FX backlogs being cleared, the firm continues to maintain its confidence in the Nigerian FX market.

“We view the associated accretion to foreign reserves of +$1.4 billion from the beginning of the year to date as a natural consequence of current monetary policy reforms and investors’ reassessment of the Nigerian investment case. We see latitude for further improvements in FX reserves due to sustained foreign inflows, higher remittances, and the recent decision to house some NNPC accounts with the CBN,” CardinalStone stated.

The firm explained that with the US Fed sticking to its prediction of three rate cuts this year, Nigeria’s carry trade may further improve, and the associated cost of the proposed Eurobond issuance may become more manageable for Nigerian authorities.

“We expect these to cascade to more dollar inflows in the near to medium term.”. The naira has strengthened at the official markets by 11.4% since the beginning of March, demonstrating remarkable resilience in recent weeks and placing it among the top-performing currencies in Africa.

These gains are attributed to the resumption of foreign exchange sales to Bureau de Change (BDC) operators, with the CBN selling approximately $20,000 to each BDC every week. With its interest in exchange rates converging, CBN has intensified its oversight of BDCs, leading to the revocation of licenses of 4,173 out of the total 5,690 operators in Nigeria.

Additionally, the CBN raised the minimum capital requirements for BDCs to N2.0 billion for Tier 1 license holders and N500.0 million for Tier 2 licenses (from N35.0 million for both Tiers), which eased the burden of regulation and streamlined players in the space to institutionally strong players. The apex bank also mandated that at least 75.0% of any foreign currency sale must be electronically transferred to the customer’s Nigerian domiciliary account or prepaid card.

Aside from BDC sales, CardinalStone said the CBN has ramped up its sales to banks, with recent transactions consummated between N1280 and N1350 per US dollar. It said these interventions are likely to subsist on the impact of continuously improving inflows through foreign portfolios and foreign direct with potential proceeds from Eurobonds and higher crude oil sales as upside risks, the firm added.

Analysts stated that positive expectations for foreign inflows into Nigeria are a result of the CBN’s pro-forex market policies as well as the high fixed-income rates. However, Nigeria is expected to face intense competition for foreign flows from countries such as Egypt.

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