As the Naira depreciated to N1, 466.31 a dollar, the lowest since March 20, the Chief Economist for Africa and Middle East at Standard Chartered, Razia Khan has said that the gain reversal is in line with a functioning market.
The Naira has reversed recent gains and was, according to Bloomberg, the worst performing currency in the world last month, a development experts say will increase pressure on the Central Bank to keep raising interest rates. According to Razia Khan $1.3 billion in naira futures will mature at the end of this month, weighing on market sentiment.
“The belief is that this will create more demand for dollars,” she said. The slide is the latest bout of volatility since Nigerian President Bola Tinubu announced the unification of the foreign exchange rates, ending the controls of the FX rate in June. The Naira has depreciated around 68 per cent against the dollar since then and Khan said its latest swing shows market forces are being allowed to work.
“When the currency appreciated very fast, there had been a bout of profit taking by offshore investors, and this meant that dollar-naira exchange rates backed up again,” Khan said. “This is completely in line with the functioning market.”
She noted that the decline will likely add pressure on the Central Bank of Nigeria to raise rates again at the conclusion of its next policy meeting on May 21. The apex bank increased rates by a total of 600 basis points at its two meetings in February and March.
That helped the naira reverse losses that took it to a low of N1, 627/$ on March 8 to N1, 072 in mid-April, as investors bought higher yielding local assets. Naira weakness was also seen on the unofficial market, where it slipped 0.9 per cent to N1,468/$ on Friday owing to increased demand from individuals and small businesses, said the President of the Association of Bureau De Change Operators of Nigeria (ABCON), Aminu Gwadabe said. The appreciation according to Senior Economist for South Africa and sub-Saharan Africa at Deutsche Bank, Danelee Masia, has stalled in the face of sluggish demand from international investors for local assets amid concerns over dwindling reserves. “We think the naira is likely to be vulnerable to stronger seasonal FX demand” for dollars,” she said.
“FX demand tends to go up in Nigeria in Q3 and Q4, driven by stronger corporate demand ahead of the holiday season.” The naira and other African currencies are being pressured by higher domestic demand for dollars to pay for the import of raw materials and other commodities including oil, said the Chief Investment Officer for UK-based Emerging Markets Investment Management Ltd, Ayodele Salami. Nigeria is one of Africa’s largest oil producers but its limited refining capacity means it is importing most of its energy products, leading to significant dollar outflows.
