Naira rally puts currency speculators on edge

Foreign exchange speculators are afraid of their investments being wiped off as the naira sustains stability against major currencies, writes FELIX OLOYEDE

Despite the 3.2 per cent month-on-month dip in the country’s external reserves to $38.46bn at the end of February, the naira strengthened by 8.5 per cent month-on-month to 1,490/$ on the parallel market during this period.

This year, the local currency has gained 2.69 per cent to 1,499.23/$ at the Nigerian Foreign Exchange Market, though it shed 1.7 per cent in February to close at 1,500/$ on the official market.

The strengthening of the naira has heightened concerns among forex speculators, who analysts projected lost about N10bn last month.

The Central Bank of Nigeria has taken different measures to tackle the volatility in the country’s forex market, which speculators were capitalising on to attack the local currency.

On January 28, the apex bank on January 28 launched the Nigerian Foreign Exchange Code to promote transparency, accountability, and ethical conduct in the country’s forex market.

This and other measures the CBN has implemented to stabilise the forex market have started to tighten the noose around currency speculators in the country.

A forex analyst, Michael Nwadike, stated that dollar savers are losing out in the current naira rally and are likely to incur further losses as holders of the greenback sell it in the open market.

According to Nwadike, the search for better returns on investment is universal, but investors should consider the risks associated with such investments.

He asserted that investors seeking to diversify their portfolios and safeguard their wealth against the depreciation of the naira by investing in dollar-denominated assets should reconsider their strategies in light of the current naira rally.

He advised authorities to adopt more pro-market strategies to encourage foreigners to take on more naira risks.

“There should also be policies that attract longer-term capital rather than fleeting hot money. Implementing appropriate reforms, improving the ease of doing business, providing adequate infrastructure, and adopting a more liberal currency regime are measures that could be considered,” he said.

According to Nwadike, the era of forex distortions in the domestic foreign exchange market ended after the CBN-backed Electronic Foreign Exchange Matching System began operations.

The implementation of the forex policy had diverse implications for all segments of the financial markets dealing with forex, including a rebound in the value of the naira across markets.

“A stabilising naira is beneficial for everyone, stabilizing at both the official markets, but it’s unfortunate for those facing capital losses. This is not the time to hoard dollars as the naira is quickly finding its footing,” a forex trader based in Mushin, Lagos, Olakunle Amos, said.

Experts’ views

A retired CBN Director, Prof. Jonathan Aremu, described the currency’s steady appreciation against the dollar as a positive development.

Aremu, who is a professor of international economic relations at Covenant University, and a regional expert on trade and investment for ECOWAS, called for increased production to sustain the naira’s gains.

He urged the CBN to focus on boosting productive activities in the economy to maintain stability.

According to Aremu, the apex bank should look beyond interest rates and consider other factors influencing production and liquidity.

“The quantity theory of money states that money supply and population value must equal price and transaction volume in the economy. If the policy only targets money supply without increasing transactions, the expected appreciation of the naira will not materialize. The economy needs a higher volume of goods and services. Many goods are available, but their prices depend on supply and demand,” he mentioned.

The President of the Association of Bureaux De Change Operators of Nigeria, Aminu Gwadabe, believed that the apex bank remained committed to resolving the forex issues confronting the nation and had been working to manage both the demand and supply side challenges.

While acknowledging the significant demand pressure for foreign exchange to meet the needs of manufacturers, tuition, medical fees, and other invisibles, he added that the monetary authority was strategizing to help Nigeria earn more stable and sustainable inflows of foreign exchange despite dwindling inflows from the oil sector.

He specifically noted that recent initiatives undertaken by the Bank, such as the FX code policy and EFEMS, have helped increase foreign exchange inflow to the country.

The CBN Governor, Olayemi Cardoso, described EFEMS as one of the many gains of the exchange rate unification policy, which is expected to bring several other benefits to market operations.

He said the policy would not only address forex market distortions, eliminate speculative activities, and instil transparency, but also make it difficult for market abuse to persist.

Cardoso highlighted that an enabling policy environment had led to a doubling of monthly remittances from an average of $300m in 2023 to nearly $600m in August 2024.

“We are committed to further integrating the Nigerian diaspora into our financial system, exemplified by the introduction of the non-resident Bank Verification Number registration. We expect our financial institutions to develop products that not only enable the diaspora to support their families but also provide opportunities for savings and investment in Nigeria,” Cardoso stated.

He noted that the current exchange rate for the naira did not reflect the true value of the local currency.

He said the current US dollar exchange rate reflects the price that the most desperate buyers are willing to pay, and this, in the apex bank’s view, does not represent the true market value of the naira.

The CBN governor expects that the introduction of the electronic marketing system will correct these distortions by enhancing the price discovery process for the naira.

Additionally, he stated that the move would significantly boost the central bank’s oversight and integration capabilities, ensuring a more stable and transparent foreign exchange market.

Cardoso also mentioned that a forex market defined solely by when and how the central bank buys or sells dollars is inadequate for the needs of a dynamic economy like Nigeria’s.

“Now is the time for banks to step up their intermediation and market-making responsibilities, providing customers with the right solutions to run their businesses and manage risk effectively,” he said.

Accelerating inflation

Comercio Partners, in its 2025 macroeconomic outlook, highlighted that the rebasing of Nigeria’s Consumer Price Index to 2024 would also create statistical effects that could lower inflation figures.

Consequently, Nigeria’s annual inflation rate dropped to 24.48 per cent in January, according to the National Bureau of Statistics. The figure is significantly lower than the previous month’s after Nigeria’s CPI was rebased for the first time in over a decade.

From the stabilisation of exchange rates, the normalisation of energy prices following the subsidy removal and improved liquidity in the forex market, the economy has the potential to achieve price stability within the year.

The Comercio Partners emphasised the importance of expanding local refining capacity, particularly with the launch of the Dangote Refinery. This development is expected to reduce the impact of exchange rate fluctuations on energy prices. By relying more on domestically refined petroleum, Nigeria is likely to see a reduction in energy price volatility.

This, combined with a more stable exchange rate, is expected to lower production and transportation costs, creating a positive ripple effect throughout the broader economy.

According to the head of investment research and global macro strategist, Comercio Partners, Ifeanyi Ubah, “We expect headline inflation to decrease to around 15 percent in the first half of 2025, indicating a gradual return to economic stability.”

The report also emphasised the importance of expanding local refining capacity, particularly with the launch of the Dangote refinery.

This development is expected to reduce the impact of exchange rate fluctuations on energy prices. By relying more on domestically refined petroleum, Nigeria is likely to see a reduction in energy price volatility. This, combined with a more stable exchange rate, is expected to lower production and transportation costs, creating a positive ripple effect throughout the broader economy.

The need to tame inflation and sustain exchange rate stability also influenced the key factors that determined the Monetary Policy Committee’s decision to keep rates unchanged at its 299th meeting in Abuja.

Accordingly, the committee voted to hold the MPR constant at 27.50 percent and retain all other parameters – the cash reserve requirement for deposit money banks and merchant banks at 50 per cent and 16 per cent, respectively; the asymmetric corridor around the MPR at +500bps/-100bps and the liquidity ratio at 30 per cent.

IMF position on dollarisation

According to an International Monetary Fund report, market participants protect their wealth by shifting to dollar savings under high and persistent inflation.

The IMF said that reversing citizens’ savings in dollars could be complex even after addressing the initial triggers, such as high inflation and exchange rate volatility.

The Fund stated that most economies operate with a forex – the dollar bias for international trade and finance invoicing.

“The optimal choice between the domestic currency and the dollar will depend on the monetary framework and the benefits that each may offer as they co-exist as two currencies,” it said.

The IMF explained that in a highly dollarized economy, there is extended use of the exchange rate for price indexation (high real dollarisation and almost complete pass-through from depreciation to inflation). Forex is also used in foreign trade.

It said: “There is limited scope for fiat currency (tax payments, public expenditure, non-durable goods, and low-value transactions; extended forex uses for durable goods, real estate, capital goods, and high-value transactions).

Also, forex takes over the role of store of value as lending capacity in domestic currency becomes limited. Most loans become forex-denominated when forex bank deposits are allowed.”

Dollar holdings by central banks

Recent data from the IMF’s Currency Composition of Official Foreign Exchange Reserves indicates a gradual decline in the dollar’s share of allocated foreign reserves of central banks and governments.

The reduced role of the US dollar over the last two decades has not been matched by increases in the shares of the other “big four” currencies—the euro, yen and pound.

Instead, there has been an increase in the share of what are termed nontraditional reserve currencies, including the Australian dollar, Canadian dollar, Chinese renminbi, South Korean won, Singaporean dollar, and the Nordic currencies.

One nontraditional reserve currency gaining market share is the Chinese renminbi, whose gains account for a quarter of the decline in the dollar’s share.

The Chinese government has been promoting renminbi internationalisation through various policies, such as developing a cross-border payment system, extending swap lines, and piloting a central bank digital currency. However, it is worth noting that renminbi internationalisation, at least as measured by the currency’s reserve share, shows signs of stalling.