Hope rises for naira over forex backlog clearance, improved reserves

Nigeria’s currency, the naira, is riding on waning demand for the United States’ dollar occasioned by recent comprehensive strategy by the Central Bank of Nigeria (CBN), to sustain significant gains across market segments in the last trading days, Business Hallmark has observed.

This came on the heels of the apex bank’s announcement of the final settlements of all valid foreign exchange backlogs, fulfilling a key pledge of the its governor, Mr. Olayemi Cardoso, to process an inherited backlog of $7bn in claims.

Our checks revealed that the exchange rate has been gaining lately as speculators begin to dump their dollar stocks, following waning demand by prospective buyers amid CBN clampdowns.

A string of circulars by the banking sector regulator in recent weeks and months have helped to plug leakages and blocked loopholes previously explored by currency speculators and racketeers.

Also, the recent clampdowns on the activities of illegal Bureau de Change (BDC) operators in Lagos, Abuja and Kano by the operatives of the Economic and Financial Crimes Commission (EFCC) have helped to reduce the volatility of the naira.

Some of the foreign exchange measures put in place by the apex bank include efforts made at achieving a willing buyer-willing seller market; removal of all limits on margins for the International Money Transfer Operator remittances; introduction of a two-way quote system and the broad reforms in the Bureau De Change segment of the market to restore stability, enhance transparency, boost supply, and promote price discovery in the Nigeria Autonomous Foreign Exchange Market.

Nigeria’s external reserves, which have sustained growth in one month, according to experts, are also helping to ease the pressure on the naira/dollar exchange rate.

Data from the CBN showed that the foreign currency reserves increased by 3.62 per cent to $34.37bn as of March 12, 2024 from $33.17bn recorded at the beginning of February 2024.

The CBN recently announced a remarkable upswing in Diaspora remittances, soaring by 433 per cent to reach $1.3b in February, compared to $300m in January.

The Acting CBN Director, Corporate Communications, Mrs. Hakama Sidi Ali, in a statement said the clearing of the FX backlogs followed a significant increase in external reserves.

She said the month-on-month increase in the reserves was driven by a marked advance in remittance payments by Nigerians overseas, as well as higher purchases of local assets, including government debt securities by foreign investors.

Ali emphasised that meticulous efforts were undertaken to settle these outstanding transactions. She explained that independent auditors from Deloitte Consulting meticulously assessed each transaction in the $7bn FX backlog, ensuring that only legitimate claims were honored. She noted that all invalid transactions were promptly flagged for further scrutiny by relevant authorities.

Cardoso had recently underscored the importance of clearing the FX backlog to restore credibility and confidence in the Nigerian economy.

According to the CBN statement, the clearance of the foreign exchange transactions backlog aligns with the comprehensive strategy outlined during last month’s Monetary Policy Committee meeting. The primary objectives include stabilising the exchange rate and mitigating imported inflation.

The statement read in parts: “Clearance of the foreign exchange transactions backlog is part of the overall strategy detailed in last month’s Monetary Policy Committee meeting to stabilise the exchange rate and thereby curb imported inflation, spurring confidence in the banking system and the economy. Cardoso used the MPC meeting and a subsequent conference call with foreign portfolio investors to set expectations for sustained increases in Nigeria’s foreign currency reserves and improved liquidity in the foreign exchange market.”

Consequently, the naira maintained a steady appreciation against the United States dollar on Thursday, gaining N18 to close 1,382/$ at the official market. This came a day after the local currency recorded major gains at both the official and parallel foreign exchange markets, closing at the parallel market at N1,400/dollar on Wednesday.

The summary of the FX trading auction revealed that naira appreciated by 1.3 percent following increased dollar supply at the Nigerian Autonomous Foreign Exchange Market, according to data from the FMDQ Securities Exchange Limited.

The dollar supplied by FX market players increased to $288.47million, an increase of $2m or 7.46 percent from $268.29 million recorded on Wednesdat from $195.13 million at NAFEM.

The improved liquidity at NAFEM followed a directive by the CBN on February 1, 2024, asking banks to sell their excess dollar stock to improve liquidity in the FX market within 24 hours.

Positive outlook

President Bola Tinubu, his Special Adviser on Media and Publicity, Ajuri Ngelale, on Friday urged Nigerians to patronise made-in-Nigeria products and services to sustain the recent gains of the naira in the foreign exchange market.

He noted that the strengthening of the naira was achieved through collaboration with the central bank and other government agencies in “dealing decisively with sharp practices on certain crypto-currency trading platforms, within the parallel market of the foreign exchange ecosystem.”

Upon assuming office 10 months ago, the Tinubu administration discontinued subsidies on petrol, which, he said, would save the government monies for infrastructural expansion.

He also unified the foreign exchange rates to curb currency arbitrage. However, these moves sparked collateral instability in the value of the naira and heaped hardship on Nigerians as food prices soared.

In February 2024, N1,900 was exchanged for one USD in the black market. The naira has recently seen a steady climb against the US dollar, exchanging N1,382/$ at the official market on Thursday.

A global investment bank, Goldman Sachs, had recently predicted that the naira would appreciate to N1200 per US dollar in twelve months. Goldman Sachs analysts, Andrew Matheny and Bojosi Morule disclosed this in their recent analysis of Nigeria’s current economic realities.

The US-based financial institution highlighted the recent upward interest rate adjustment by monetary authorities in Nigeria and a recent N1.6tn bill auction by the central bank as signals that the country is turning the tables on a previous unorthodox policy regime that hindered the naira from trading freely.

“These developments have prompted us to shift to a constructive outlook for the naira, which our FX strategists expect to appreciate to NGN 1200 vs. the USD in 12 months,” Goldman Sachs said.

The Managing Director/Chief Executive Officer of Financial Derivatives Company Limited Bismark Rewane believes better days are ahead for the naira.

Although the country’s currency had fallen sharply against major currencies in recent months, Rewane, who was a guest on Channels Television’s Politics Today which aired on Thursday, said the appreciation of the naira is sustainable.

“The truth is that it is sustainable as long as you do a number of things,” he said when asked if the recent appreciation of the local currency is sustainable.

“One is that interest rate has been increased therefore the propensity to save has increased and the propensity to consume has actually reduced. People are consuming less and saving more if they are saving.”