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Foreign investors halt over Naira instability

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By Usman Oladimeji

Implementing measures is necessary to enhance market, reassure investors.

Nigeria is experiencing a hold off in new investments from foreign investors due to the unstable value of the naira. An anticipated $700 million influx has been put on hold as investors become hesitant and worry about potential losses caused by the naira’s fluctuating value. According to a source, foreign investors who anticipated the exchange rate to peak at ₦1,550/$ and invested have now incurred mark-to-market losses on the currency. The foreign exchange market received over a billion dollars in foreign inflows two weeks ago due to the Central Bank of Nigeria (CBN) finally implementing long-awaited reforms in the market.

Reforms aimed at promoting currency stability in Nigeria, such as increased transparency in the pricing of the dollar and higher interest rates on treasury bills at Nigerian Autonomous Foreign Exchange Market (NAFEM), initially led to a surge in dollar inflows and a stabilization of the naira following a turbulent period. However, this period of stability was short-lived as the currency began a downward spiral again last week, reaching a record low of ₦1,665.50 against the US dollar on the official market. Towards the end of the week, the currency managed to recover some of its losses in the parallel market by appreciating to ₦1800/$ on Friday, following a drop to as low as ₦1900/$.

Central bank halted the sale of USD in the spot market.

It is essential to implement measures such as bringing back the 13-month Non-Deliverable Forward (NDF) for foreign investors, providing a weekly option for one-year Treasury Bills with the auction offer size disclosed in advance for better planning, and ensuring continuous intervention by the CBN through dollar sales in the NAFEM to enhance market liquidity and reassure investors. After a five-month hiatus, the CBN resumed selling dollars in the spot market on February 13 by offering $87 million to banks. Tajudeen Ibrahim, who serves as the director of research and strategy at Chapel Hill Denham, a Lagos-based investment bank, emphasized the necessity of seeing an uptick in supply moving forward.

Last week, the CBN once more entered the market to offer around $85 million to participating banks at the official exchange rate. While this move is positive, Ibrahim believes it falls short in supporting the currency’s stability. The CBN’s recent intervention is significantly lower than the daily sales it made in the market the previous year. To address the backlog of foreign exchange that was discouraging foreign investors from injecting fresh capital into the economy, the central bank halted the sale of USD in the spot market.

Naira initially strengthened due to implemented reforms.

Recent action from the CBN in the market is part of a series of efforts to increase liquidity in the FX market and prevent rates in both the official and black markets from experiencing drastic fluctuations like they did when the naira was initially permitted to freely trade against the dollar in June. Also, the apex bank has implemented measures to improve transparency in pricing within the official market, raise market interest rates, require banks to sell excess funds, and eliminate transaction limits for International Money Transfer Operators to attract more diaspora funds.

According to sources, the expected benefits of the recent regulation on banks’ net open position have been limited by ineffective enforcement. The regulation aimed to require banks to reduce their surplus dollars, with an estimated offload of over $5 billion into the market. However, due to ongoing concerns about enforcement measures, this offloading has not occurred as planned, as disclosed by a source knowledgeable about the issue. The naira initially strengthened due to the reforms, but a sudden dollar shortage eroded the gains. The gap between official and parallel market rates has now widened to over 10 percent, despite narrowing to just 2 percent after the reforms were implemented.

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Several analysts interviewed by the media prior to the Monetary Policy Committee meeting held on 26 – 27 February suggest that increasing interest rates is necessary to stabilize the naira. It is anticipated that there will be a 300 basis point rise in benchmark interest rates as the CBN aims to indicate a tightening of monetary policy to control the rapid inflation. It was reported that foreign investors will seek clarification about the naira during a call with CBN governor Cardoso hosted by the Nigerian Exchange Group (NGX) on 28th of February, as questions surrounding the currency remain.

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