The Nigerian naira has recently shown signs of resilience against the US dollar, supported by a mix of factors, including improved foreign investor sentiment, higher yields on Nigerian bonds, and a more predictable forex market. However, a deeper analysis reveals a two-speed recovery, with the official market performing better than the parallel market.
In February, the naira depreciated by 1.69% in the official market but appreciated by 7.33% in the parallel market, resulting in a year-to-date gain of 2.48% and 9.67% in the official and parallel markets, respectively. This divergence is largely due to the Central Bank of Nigeria’s (CBN) sustained forex interventions, which have eased pressure on forex demand and improved dollar liquidity in the official market.
Despite these positive developments, concerns linger about the sustainability of the naira’s strength. The CBN’s interventions have come at a cost, with Nigeria’s gross external reserves declining to $39.10 billion. Additionally, Brent crude oil prices, a major source of Nigeria’s forex earnings, dropped to $75.02 per barrel, raising questions about future forex inflows.
In an interview with LN247, financial analyst Mr. Muktar Mohammad explained that the naira’s recent gains were driven by CBN’s interventions in the retail market. However, he cautioned that these gains might not be sustainable without fundamental economic improvements.
“The naira has been gaining over the dollar this week, but this gain has slowed down. The reason for this gain is the CBN’s intervention, especially in the retail segment of the market,” he said.
Mr. Mohammad further highlighted that low oil prices, high debt servicing costs, and significant government spending could impede the naira’s momentum. For sustained strength, he suggested that Nigeria must boost forex liquidity through higher oil prices and increased foreign direct investment (FDI).
“With low oil prices, high debt servicing, and large government spending, I don’t think the current momentum can be sustained. To keep the naira strong, we need to attract more FDI and ensure a steady inflow of dollars,” he added.
Analysts remain cautiously optimistic about the naira’s prospects in 2025, pointing to improved market confidence and potential inflows from autonomous sources. However, they emphasize the need for consistent economic reforms and a stable forex management approach to ensure long-term stability.
“If the naira is to sustain its strength against the dollar in 2025, there must be increased liquidity in the forex market, especially in the retail segment, either through Bureau de Change or CBN’s planned recapitalization,” Mr. Mohammad stated.
While the naira’s recent performance offers a glimmer of hope, its long-term strength depends on addressing fundamental economic challenges and maintaining a balanced forex policy.
Why Did the Naira Depreciate Against the Dollar?
The Nigerian naira weakened against the US dollar on Wednesday, hitting a high of N1,505 due to increased demand for dollars. Traders attributed the pressure to businesses and individuals seeking USD for imports, foreign investments, and hedging against further depreciation. Despite the Central Bank of Nigeria’s (CBN) efforts to manage the naira, the rising demand underscores ongoing challenges. Enhancing local production and reducing import dependency remain crucial for stabilizing the naira and fostering economic growth.
Why Is Demand for the US Dollar Increasing?
- Import Needs: Businesses reliant on imported goods and services face higher costs due to global inflation and supply chain disruptions. To secure these essential supplies, they require more dollars, putting additional pressure on the naira.
- Foreign Investment: Although Nigeria has attracted some foreign investment, particularly in the oil and gas sector, investors are increasingly repatriating their profits, leading to an outflow of dollars and further weakening the naira.
- Hedging: With the naira’s value under pressure, individuals and businesses are converting their naira holdings into dollars as a protective measure. This hedging strategy, while understandable, exacerbates the demand for dollars and accelerates the naira’s depreciation.
The rising demand for dollars—driven by import needs, foreign investment outflows, and hedging against further depreciation—continues to challenge the naira’s stability. The CBN’s efforts to manage the situation highlight the complexities involved in stabilizing the currency in the face of multiple economic pressures.
