• Naira sustains rally
• Foreign reserves drop
Total inflows into the foreign exchange (forex) market rose by about 42 per cent last month to hit its highest level in the past five years as domestic and foreign investors continued to react positively to the nation’s macro-economic reforms.
Data from the Nigerian Autonomous Foreign Exchange Market (NAFEM) at the weekend showed that the forex inflows has sustained double-digit growth .
The naira also continued its rally.
NAFEM data, obtained from the FMDQ, showed that inflows rose by 41.7 per cent which translates to moving from $2.64 billion in February to $3.75 billion last month, the highest level since March 2019.
The upsurge was driven by significant increase in supplies from both domestic and foreign sources. The rally was notably driven by non-government sources, with less inflows from the Central Bank of Nigeria (CBN).
A breakdown showed that domestic sources accounted for 59 per cent of total transactions while foreign sources contributed 41 per cent.
Notably, inflows from foreign sources jumped by 39.6 per cent from $1.10 billion in February 202 to $1.54 billion last month.
Inflows from local sources increased by 43.2 per cent from $1.54 billion in February to $2.21 billion last month,, with double digit growths across the non-CBN sources.
While inflow from the CBN dropped by 65.7 per cent, inflows from individual domestic sources quadrupled by 405.8 percent, non-bank corporate sources rose by 157.7 percent while inflows from exporters grew by 14.6 percent.
With these, average total monthly inflows into the NAFEM in first quarter of this year stood at $2.47 billion, representing an increase of 84.3 percent and 126.6 percent on monthly average of $1.34 billion and $1.09 billion recorded in first and fourth quarters of last year.
The naira continued its rally with 4.7 percent gain to close weekend at N1,251.05 per dollar. In the forwards market, naira appreciated across all tenors.
The one-month forwards appreciated by 4.4 per cent to N1,277.79 per dollar, three-month forwards rose by 5.5 percent to N1,302.91 per dollar, six-month forwards improved by 5.7 percent to N1,360.09 per dollar while the one-year contracts rallied by 4.2 percent to N1,479.02 per dollar.
The appreciation at the forwards market underlined a near consensus among analysts, projecting a stable and resilient naira going forward.
However, the nation’s forex reserves, which had gained $1.04 billion to close first quarter at $33.952 billion, dropped to $33.51 billion at the weekend.
Analysts at Cordros Capital Group attributed the upsurge in foreign inflows to positive reaction to recent initiatives by the CBN aimed at ensuring liquidity and stability within the forex market.
“In the near term, we anticipate improvement in forex liquidity conditions, although still weak relative to historical standards,” Cordros Capital stated, projecting sustained improvement in foreign inflows.
The analysts said CBN interventions have bolstered investors’ confidence, reduced speculative activities and market distortions, and improved liquidity in the forex market.
They added that continuous improvements from non-CBN sources would support the naira stability in the meantime, despite the relative weak position of the nation’s forex reserves.
“While CBN’s intervention in the forex market is poised to remain frail in the near term given its low forex reserves, we expect the naira to remain stable in the short term, supported by tighter monetary policy conditions and improved forex liquidity,” Cordros Capital stated.
The naira had regained more than one-fifth of value in recent weeks as increased foreign exchange (forex) inflows saw Nigeria’s forex reserves rising by $1.04 billion in the first quarter.
Forex reserves which had ended last year at $32.912 billion, closed first quarter 2024 at $33.952 billion, an increase of $1.038 billion. The build-up of the forex reserves came within the same period the CBN completed payment of forex backlog of $7 billion.
Naira rose by about 22 per cent in March to close at N1, 303.842 per dollar as against N1, 544.08 per dollar recorded at the end of the previous month. At the parallel market, the naira rose by about 20 percent to close the month at N1,300 per dollar.
Analysts agreed that the forex reserves accretion and naira gain may continue in the period ahead as inflows remain upbeat.
Analysts at Financial Derivatives Company (FDC), Cordros Capital, Afrinvest Securities and Arthur Steven Asset Management said they expected the naira to remain stable in the meantime, given the monetary stance of the CBN.
Managing Director, Financial Derivatives Company (FDC Bismarck Rewane said the monetary stance suggests further stability in naira and increase investors’ confidence in the economy.
He noted that the high interest rate is expected to support investment inflows from portfolio investors, which combined with a quadruple in remittance inflows and rebounding oil and non-oil export earnings, will support external reserves, aiding the CBN’s intervention efforts at the official window.
“Essentially, the naira’s stability will continue amid higher interest rates,” Rewane stated at the weekend.
He added that while it might still take some short time for exchange rate gains to translate to reduced commodity prices in the open markets, “the future holds bright promises”.
Afrinvest stated that the naira would remain stable and trade within similar band over the next weeks as the apex bank continues to attract more capital inflow.
Managing Director, Arthur Steven Asset Management, Mr. Olatunde Amolegbe, said continuing increase in forex reserves will support current efforts aimed at fostering liquidity and stability at the forex market.
“The increase is a positive signal for improved liquidity in the forex market. This should ultimately help to stabilise the exchange rate and strengthen it further,” Amolegbe said.
President, Association of Capital Market Academics in Nigeria Prof Uche Uwaleke said any increase places the CBN in a good position to meet forex obligations as well as 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 said.
He noted that inflation rate will most likely moderate given the exchange rate pass-through to commodity prices.
With the lingering crises in Middle East and Eastern Europe amid elevated oil demand, most analysts expected crude oil price to remain substantially above Nigeria’s budget benchmark of $77.96 per barrel.
The International Energy Agency (IEA), in its latest report, increased its global crude oil demand projection for 2024 by 1.3 million barrels per day (mbpd) to 103.2mbpd.
IEA estimated that extended output cuts by Organisation of the Petroleum Exporting Countries (OPEC) and its affiliates (OPEC+) would continue to moderate supply output, keeping off any major downside volatility.
OPEC+ members had extended their voluntary production cuts of 2.2mbpd into the second quarter of 2024, with expectation of further extension beyond the first half.
Central Bank Governor Olayemi Cardoso has outlined that ongoing efforts to strengthen the country’s forex position would lead to increased stability in forex reserves and naira.
He said the collaboration with Ministry of Finance and the NNPCL to ensure that all forex inflows are returned to the CBN will greatly 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.
“This reform is designed to streamline and unify multiple exchange rates, fostering transparency and reducing opportunities for arbitrage. The resulting consistent and stable exchange rate will not only boost investor confidence but also attract foreign investment, elevating Nigeria’s appeal to global investors.
“We are implementing a comprehensive strategy to improve liquidity in our forex markets in the short, medium, and long term. Our focus is on addressing fundamental issues that have hindered the effective operation of our markets over the years,” Cardoso said.
He said the apex bank understands that upholding the integrity of financial markets is crucial for building confidence, thus it remains committed to decisively address any infractions and abuses.
He noted that in efforts to stabilise the exchange rate, the CBN prioritises transparency and a market environment that enables the fair determination of exchange rates, ensuring stability for businesses and individuals alike.
“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 said.
Economic experts were unanimous that the build-up in external reserves was a good indication for the country’s currency management and macro-economic stability.
