The Nigerian Naira continues to face significant challenges in the unofficial market, trading as low as N1750/$ during the midweek session. This decline is driven by strong demand for the US dollar, which is considered a safe-haven currency amidst various macroeconomic pressures in Nigeria. The unofficial market is seeing a widening gap in currency supply, exacerbating the Naira’s depreciation.
Data from the FMDQ Exchange’s official platform reveals a slight improvement in the Naira’s performance, as it appreciated by N11.4/$ from the N1,690/$ it traded at on Monday. Despite this, the overall liquidity in Nigeria’s foreign exchange market has remained tight, with Tuesday’s total daily turnover falling from $173.14 million to $128.59 million.
Key Factors Contributing to Naira’s Struggles:
- High Demand for Dollars: Continued demand for foreign currency driven by expenses like foreign tuition fees, fuel imports, Christmas vacations, and people seeking to hedge against Naira depreciation, has intensified pressure on the Naira.
- Weak Oil Production and Inflation: Persistent challenges such as weak oil production, high inflation, tight monetary policies, and low foreign direct investment have worsened the foreign exchange situation in Nigeria. These factors contribute to a higher reliance on imported goods, which further strains the country’s FX reserves.
- FX Reserves and Naira’s Depreciation: Despite the Central Bank of Nigeria (CBN) reporting a rise in foreign exchange reserves to $40 billion, the Naira has depreciated by 70% since the middle of last year. The strengthening of the US Dollar index amid global economic uncertainties has also played a role in the Naira’s continuing weakness.
- Currency Reforms and Impact: While President Bola Tinubu’s administration took steps to liberalize the Naira by loosening currency controls last year, the resultant inflation spike has added to the cost-of-living crisis in the country, making the Naira’s depreciation even more pronounced. Businesses with dollar-denominated debt are increasingly focused on reducing their exposure, despite higher borrowing costs in Naira.
- Market Outlook: The outlook remains pessimistic for the Naira, with foreign exchange demand likely to rise further in the coming months, driven by seasonal pressures and structural issues in Nigeria’s economy.
Global Dollar Trends Impacting the Naira:
The US Dollar index (DXY) recently dipped to a one-week low as global market conditions adjusted following significant moves in US economic policy. The DXY, which measures the strength of the dollar against major currencies, had surged in recent weeks but faced a slight pullback. This dip in the dollar index could provide some temporary relief for emerging market currencies like the Naira, though the broader outlook for the Naira remains challenging due to the ongoing supply-demand imbalance.
In sum, while the US Dollar index showed signs of slight consolidation after recent gains, Nigeria’s FX market remains under heavy strain, and the Naira is likely to face continued pressure as demand for dollars remains high.
