Nume Ekeghe
Experts in the Nigerian financial service sector have attributed the recent gains by the naira against the U.S Dollars to a combination of factors including renewed market confidence and strategic interventions by the Central Bank of Nigeria (CBN).
In a significant turn of events, the naira has witnessed a robust resurgence against the US dollar in recent days. The naira strengthened further last week, buoyed by a combination of factors, according to analysts.
A breakdown of the performance showed that at the official NAFEM window, the naira last Friday closed at N1,453/$1, a significant gain from N1,598/$1 at the beginning of the week. The parallel market also saw positive movement, with the Naira closing at N1,470/$1 last Frday up from N1,600/$1 on Monday.
Speaking on the development, Special Adviser to the Senate Committee on Banking, Insurance, and Other Financial Institutions, Uche Uwaleke, hailed the recent developments as a positive shift in sentiment.
Uwaleke noted that the gains are as a result of CBN’s actions, including the clearance of foreign exchange backlog and the resumption of FX sales to qualified BDCs.
Furthermore, Uwaleke highlighted favourable oil prices and increased crude oil production as additional factors supporting the naira, which has also aided the increase in external reserves as well as capital inflows from multilateral loans.
He said: “It is a welcome development, what is happening now is the return of confidence to the forex market as a result of some of the actions of the CBN. Also, the ability of the central bank to clear of valid forex backlog has helped to bring down speculation and improve confidence.
“The resumption of FX sales to qualified BDCs has gone a long way in improving liquidity in the retail segment of the forex market which has also reduced speculative activity. Also, when the CBN began the process of sanitizing the BDC space including through withdrawal the licence of over 4000 BDCs in my view, that has gone a long way to reduce speculation and the clamp down on Binance too I will say has been positive because Binance activities were helping to fuel speculation.”
He added that the increase in crude oil production and favourable oil prices have also played a pivotal role in supporting the naira gains.
He added: “Crude oil production has increased from 1.5 million barrels per day to 1.65 million barrels per day, now approaching 1.7 million barrels per day, and oil price has also been favorable. So fortunately for Nigeria, oil prices has also been on the rise.
“So, with favorable oil price, increase in crude oil outputs as a result of a reduction in crude oil thefts. So we are having an increase in crude oil revenue, and that is translating to an increase in external reserves.
“Central bank has also received some loans from Afreximbank from the World Bank, I also see a situation in which by and the exchange rates may, may stabilise around maybe N1000/$1 naira or N1100/$1 naira by the end of the year. Also, there is a plan to issue Eurobonds this year and that would also help sustain the gains.”
On his part, the Head, of Financial Institutions Ratings at Agusto & Co, Mr. Ayokunle Olubunmi elucidated on the multifaceted drivers behind the naira’s recent gains.
He highlighted the impact of the US dollar’s depreciation against major currencies, contributing to the naira’s strengthening. Moreover, he emphasised the attractiveness of higher interest rates set by the Central Bank of Nigeria (CBN), diverting funds from speculative activities towards fixed-income securities.
Olubunmi said: “The gain is from a multitude of factors. If we check against all currencies, it seams as if the dollar seems to be losing. So you see that even when comparing to the Dollar to Euro or pounds, the dollar is losing. Also, as CBN raises rates, some funds that ordinarily would have gone to the black market or speculators are now attracted to high-interest rates. So those funds are leaving the FX market and going into fixed-income securities.”
The CBN, he stated, has also been able to get more dollar funds, “if you recall the last two OMOs they did, they got a lot subscription from foreign investors which has helped. So what I’ve been able to do is now increase supply to the official market because all through last year, CBN didn’t intervene at all in the market. It was just a trickle of some suppliers or investments bringing in money. Now CBN has been intervening which has caused the naira to appreciate and with some demand in the black market is going to the official market. Also, the CBN claiming to settle the backlog of matured FX signifies to the market that they have dollars.”
He said: “How sustainable, it is would depend on how much firepower the CBN has to intervene, in the next three to four months would show us if it is sustainable because of a concern is that the flow of dollars is not from sustainable sources because FPIs are hot money or yield hunters. Once they see they can get better yields somewhere they will leave your country. However, if the Federal go ahead with Eurobond, it would proffer buffers because the sources of FX now is not sustainable.”