The naira is bracing for increased demand as forward futures contracts totaling approximately $1.3 billion are set to mature by the end of this month, adding further strain to the currency’s value. Recent weeks have witnessed a reversal of the naira’s gains, undoing its status as one of the best-performing currencies last month.
Bloomberg reported last week that the naira’s loss of momentum had relegated it to the bottom tier, marking it as the worst-performing currency. This shift comes less than a month after the Central Bank of Nigeria Governor touted the naira as the best-performing currency at the 2024 spring meetings of the IMF/World Bank.
Within a month, the naira’s status has shifted from being a top performer to one of the weakest currencies globally, according to Bloomberg. From its earlier rate of N2,000 to the dollar earlier this year, the naira had depreciated to N1,000 last month, only to reverse course and close at N1,466.31 to the dollar.
Trading at the Nigeria Autonomous Foreign Exchange Market (NAFEM) witnessed transactions ranging from N1,322 to N1,490 to the dollar last week Friday, with turnover halving from the previous day to $84 million.
Razia Khan, Chief Economist for Africa and the Middle East at Standard Chartered, estimates that the maturation of $1.3 billion in naira futures by month-end will dampen market sentiment, anticipating increased demand for dollars.
Danelee Masia, Senior Economist for South Africa and sub-Saharan Africa at Deutsche Bank, attributes the stalling of naira appreciation to subdued demand from international investors for local assets amid concerns about declining reserves. She predicts heightened demand for dollars in Nigeria in the third and fourth quarters, driven by increased corporate demand ahead of the holiday season.
On Friday, the naira plummeted to its lowest level in a month, reaching N1,470 to the dollar on the parallel market due to a scarcity of dollars and speculative trading. This decline was spurred by heightened demand for dollars, particularly for purposes such as education, healthcare, and tourism.
The recent depreciation signals another phase of instability following President Bola Ahmed Tinubu’s decision to relax foreign exchange restrictions in June. Since then, the naira has lost approximately 68 per cent of its value against the US dollar. Khan observes that this latest fluctuation underscores a shift towards allowing market forces to influence currency values.
The devaluation of the naira is expected to intensify pressure on the Central Bank of Nigeria to hike rates once more after its upcoming policy meeting on May 21. In February and March, the bank raised rates by a total of 600 basis points, aiding the naira’s recovery from a low of N1,627 on March 8 to N1,072 by mid-April as investors were attracted to higher-yielding local assets.
