The Nigerian Naira showcased its strongest performance in over eight weeks as it closed at N1,300/$1 on Wednesday, marking a significant uptick in its value against the US Dollar.
Data obtained from the Financial Markets Dealers Quotations (FMDQ) revealed this positive momentum, which was echoed in the parallel market where exchange rates ranged between N1,250 and N1,300 for both cash transactions and inflow-related transfers.
According to the FMDQ, Wednesday’s closing exchange rate of N1,300.43 represents the currency’s most robust showing since January 26, 2024, when it closed at N891.9/$1. The day witnessed a fluctuation in rates, with the intra-day high hitting approximately N1,460/$1, while the intra-day low settled at N1,200/$1. Moreover, the total turnover for the day stood at $416 million, marking the highest forex volume recorded since February 6, when it reached $465 million.
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The improved exchange rate can be attributed to several monetary policies implemented by the Central Bank of Nigeria (CBN), primarily centered around higher interest rates for Open Market Operations (OMO) bills and Treasury bills. Recent Treasury bills auctions saw interest rates climbing to 21.5%, attracting over N1.5 trillion in allocations. Higher interest rates are typically interpreted as measures to combat inflation while attracting foreign capital inflows.
Furthermore, the CBN has revised its forex policies, allowing the exchange rate to be determined by market forces and resuming the sale of forex to Bureau De Change (BDC) operators. The apex bank sold $10,000 to BDCs at an exchange rate of N1,251/$1, further bolstering the currency’s strength.
Will the rally be sustained?
While the current naira gain yields a positive outlook, there is concern about whether it will be sustained. The gains are largely tied to the CBN’s subsidized supplies to BDCs at N1,251/$1. The subsidy is believed to emanate from the increase in Nigeria’s foreign reserve, put at $35 billion by the CBN.
However, the growth of the foreign reserve is significantly tied to Nigeria’s oil output, which has continued to record decline over the past eight years – mainly because of oil theft and oil installations vandalism. The situation is expected to affect as much as 25% of the nation’s oil production.
The Minister of State Petroleum Resources (Oil), Heineken Lokpobiri, acknowledged the challenge, noting that Nigeria has in the last five years slowed down investments.
“We are the lowest in the world, if you talk of investment to reserves ratio, Nigeria is 25 per cent. Nigeria is the least in the world. Between 2017 and 2022, if you look at the figures, Nigeria’s investments compared to our reserves are 25 per cent. There is something we are not doing right,” he said.
Recently, Nigeria’s OPEC quota was reduced from 1.742 million barrels per day (mbpd) to 1.38mbpd. However, the country is still struggling to meet this quota, with daily production averaging 1.3 million barrels per day.
The CBN said earlier in the year that it expects revenue from oil to nosedive in 2024.
Against this backdrop, it is believed that the foreign reserve where the current CBN’s subsidized FX supplies to the BDCs are coming from will witness a decline in the long run. Analysts said that as long as the subsidy is coming from the FX reserve, the naira will eventually lose its gains.