Nigeria’s foreign exchange market has yet to stabilise despite several initiatives by the Central Bank of Nigeria, Fitch Ratings, a global rating agency, has said.
This view slightly contrasts with a report by the International Monetary Fund, which suggested that the naira was showing signs of stability, owing to recent interest rate hikes and CBN efforts to address outstanding FX obligations.
In its Global Financial Stability Report, the IMF pointed to policy actions by Nigerian authorities, crediting CBN’s efforts to clear overdue FX commitments as key to the naira’s apparent stabilisation.
“Policy actions by local authorities have also resulted in positive developments; for example, in Nigeria, rate hikes and the clearing of overdue domestic central bank foreign exchange obligations have helped the naira show more signs of stability,” the IMF noted in its report.
However, Fitch’s latest rating of Nigeria suggests a more cautious outlook. The rating agency commented, “The Central Bank of Nigeria is initiating several measures to address FX liquidity challenges and formalise FX activity to support the currency. These include plans to introduce an electronic FX matching platform for all FX transactions effective December 1, 2024, to provide intra-day prices in real-time and enhance transparency.
“The CBN has also raised the monetary policy rate five times by a cumulative 850bp to 27.25 per cent since February 2024. However, Fitch believes that the FX market has yet to stabilise, and the ongoing flexibility of the exchange rate remains to be tested.”
Fitch further noted an increase in Nigeria’s gross FX reserves, which rose to $39bn in mid-October from a low of $32.1bn in mid-April.
The agency attributed this rise to official disbursements, remittances, portfolio inflows, and an improved trade balance, the latter boosted by lower imports amid higher domestic refining production and the dampening effect of currency depreciation on local demand.
“We forecast FX reserves to rise to 6.1 months of current external payments at end-2024 (‘B’ median 3.7) and to average 5.3 months in 2025-26,” Fitch added.
However, the agency expressed caution regarding the true net reserves position, estimating that about a quarter of current gross reserves are comprised of FX swaps with local banks.
“There is significant uncertainty over the size of net reserves. We estimate that around one-quarter of current gross reserves are made up of FX swaps with local banks, although we expect most of these to continue to be rolled over,” Fitch stated, noting that while these FX swaps are expected to be rolled over, they still contribute to uncertainty in the FX market’s stability.
CBN Governor Olayemi Cardoso recently said the confidence in the naira is “gradually returning”, noting that the apex bank is focused on ensuring stability.
Speaking at the World Bank’s launch of the Nigeria Development last month, Cardoso said, “The confidence in the naira is gradually returning as a result of the policies that we are already undertaking, which goes back to the whole issue of Orthodox monetary policy, that is really what begins to encourage people to hold onto naira.”
“Over a period of time, we believe that the confidence will continue to go up,” the CBN governor added.
He explained that orthodox policies are implemented to give confidence in the naira, adding that this will bring trust in the naira.
The CBN governor said the apex bank is putting out efforts to ensure stability in the exchange rate which has continued to fluctuate since the unification of the market segment last June.
“The CBN doesn’t determine the exchange rate. The fundamentals do. We will provide policies to make sure the policies are there in the market,” he said.
Cardoso said the CBN is focused on ensuring transparency and sanctioning those who would like to take advantage of the market.
He noted that the monetary policies are driving FX inflows which have seen the country’s reserves grow to about $39bn in October.
However, despite the efforts of the CBN, challenges still persist in the market, with the naira trading above N1,600.