Naira rallies amid rising foreign reserves, boosting economic stability

Naira rallies amid rising foreign reserves, boosting economic stability

The Nigerian naira rallied significantly over the weekend, buoyed by a sustained increase in the country’s foreign exchange (forex) reserves. This positive movement signals a potential stabilization in Nigeria’s often volatile currency market.

Naira Appreciation and Foreign Reserves Growth

At the Nigerian Autonomous Foreign Exchange Market (NAFEM), the naira appreciated by 1.0 percent, trading at N1,482.81 per dollar. This gain follows a consistent buildup in the nation’s forex reserves, which increased by an additional $73.05 million to reach $32.74 billion. This marks the fifth consecutive increase in the reserves, with recent weeks showing increments of $195.01 million, $89.76 million, $132.68 million, and $10.76 million.

In the forwards market, naira contracts showed positive trends, with the one-year contract appreciating by 1.1 percent to N1,504.10 per dollar. The three-month contract rose by 1.4 percent to N1,546.65 per dollar, and the six-month contract increased by 0.6 percent to N1,621.89 per dollar. However, the one-year contract slipped slightly by 0.1 percent to N1,769.62 per dollar.

Expert Opinions on Forex Reserve Buildup

Finance and economy experts have lauded the buildup in external reserves as a positive indicator for Nigeria’s currency management and macroeconomic stability. They expect that improved crude oil production, a steady rise in global oil prices, and changes in forex management rules could help mitigate Nigeria’s forex volatility.

Prof. Uche Uwaleke, President of the Association of Capital Market Academics in Nigeria, emphasized that the increase in reserves places the Central Bank of Nigeria (CBN) in a stronger position to meet forex obligations and intervene in the forex market. “If this development is sustained, we are likely to witness an appreciation of the naira in the forex market and more stability in the exchange rate following improved liquidity. This is one positive development capable of keeping away destructive speculators from the forex market,” Uwaleke stated.

However, Uwaleke also highlighted the need for Nigeria to reduce its excessive import dependence to support its forex recovery. He suggested the enactment of a ‘Buy Nigeria law’ similar to the ‘Buy America Act’ to change consumption behavior and support local products.

Proposals for Sustainable Forex Management

To address the forex crisis sustainably, Uwaleke proposed revisiting and expanding the CBN’s currency swap deal with the People’s Bank of China. Given that a significant portion of Nigeria’s imports come from China, settling these transactions in the Chinese Yuan rather than the US dollar could be beneficial. He also recommended issuing panda bonds, which are bonds denominated in Yuan and are generally cheaper than Eurobonds.

Olatunde Amolegbe, Managing Director of Arthur Steven Asset Management, echoed the sentiment that the continuing increase in forex reserves would support government efforts to foster liquidity and stability in the forex market. “The increase is a positive signal for improved liquidity in the forex market. This should ultimately help to stabilize the exchange rate of the naira or even strengthen it against the dollar if the increase is steady and consistent,” Amolegbe said.

International Monetary Fund (IMF) Assessment

The IMF, in its latest macroeconomic assessment report, expressed optimism about Nigeria’s economic reforms. The report cited improvements in oil production, efforts to boost food production, and social welfare programs as positive developments for the country’s macroeconomic stability.

CBN’s Strategic Focus

Dr. Olayemi Cardoso, Governor of the CBN, outlined ongoing efforts to strengthen Nigeria’s forex position, which would lead to increased stability in forex reserves and the naira. He emphasized the collaboration with the Ministry of Finance and the Nigerian National Petroleum Corporation Limited (NNPCL) to ensure that all forex inflows are returned to the CBN. This collaboration is expected to enhance forex flows and contribute to the accretion of reserves.

“The expected stability in the foreign exchange market for 2024 can be attributed to the reduction in petroleum product imports and the recent implementation of a market-determined exchange rate policy by the CBN,” Cardoso noted. This policy aims to streamline and unify multiple exchange rates, fostering transparency and reducing opportunities for arbitrage. The resulting consistent and stable exchange rate is expected to boost investor confidence and attract foreign investment, enhancing Nigeria’s appeal to global investors.

Cardoso emphasized that the CBN is implementing a comprehensive strategy to improve liquidity in the forex markets in the short, medium, and long term. The focus is on addressing fundamental issues that have hindered the effective operation of the markets over the years. He also stressed the importance of upholding the integrity of financial markets to build confidence, stating that the CBN remains committed to addressing any infractions and abuses decisively.

Government’s Stance on Forex Market Integrity

The Nigerian government has directed the CBN, the Federal Airports Authority of Nigeria (FAAN), and relevant agencies to ensure the rights of Nigerian passengers and businesses are protected in the forex market. This directive comes amid ongoing efforts to stabilize the exchange rate and promote a transparent market environment that enables fair determination of exchange rates.

“We believe that the naira is currently undervalued and, coupled with coordinated measures on the fiscal side, we will expedite genuine price discovery in the near term. This coordinated approach will contribute to a more balanced and stable exchange rate,” Cardoso added.