The Nigerian Naira experienced a slight depreciation against the U.S. Dollar on Wednesday, October 30, 2024, at the official foreign exchange market. According to the Nigerian Autonomous Foreign Exchange Market (NAFEX), the local currency was valued at N1,631.17 to $1.
This depreciation comes amid a broader global market recovery, as the U.S. Dollar Index (DXY) rebounded after a sharp drop earlier in the week. The dollar’s strength has been bolstered by a series of mixed U.S. economic reports, with the currency showing modest gains in Thursday’s trading session.
Currency Market Pressures in Nigeria
Nigeria’s foreign exchange market continues to face pressures due to high inflation, rising money supply, and a significant government budget deficit. Data from the Central Bank of Nigeria (CBN) shows that Nigeria’s money supply, referred to as M3, grew by 62.8% year-on-year, reaching N109 trillion in September 2024, up from N66.94 trillion in the same period last year. This substantial increase in money supply has contributed to inflationary pressures and challenges in the forex market.
The Naira’s depreciation is also partly due to a growing demand for foreign currency amid Nigeria’s economic challenges, including high fiscal deficits and government spending.
Partnership with the International Finance Corporation (IFC)
In an effort to address some of these challenges, the Central Bank of Nigeria has partnered with the International Finance Corporation (IFC), a member of the World Bank Group, to reduce foreign exchange risks and increase local currency financing for Nigerian businesses.
Under this partnership, the IFC plans to significantly expand its investment in Nigeria, with a target of over $1 billion in funding over the coming years. The initiative aims to manage foreign exchange risks and direct investments into critical sectors such as small and medium-sized enterprises (SMEs), agriculture, housing, infrastructure, and energy.
The move is expected to help increase local currency loans and alleviate some of the pressure on Nigeria’s foreign exchange reserves.
U.S. Dollar Recovery
On the global front, the U.S. Dollar showed signs of recovery after a sharp decline on Wednesday following the release of mixed U.S. economic data. The ADP Employment Change report for October showed an increase of 233,000 jobs, outperforming expectations. However, the third-quarter U.S. GDP growth was revised down to 2.8%, lower than market expectations, which contributed to initial weakness in the dollar.
Despite the mixed data, the dollar rebounded on Thursday, with the U.S. Dollar Index (DXY) rising by 0.15% to 104.02. The euro and British pound both saw slight declines, with the euro trading at $1.0871 and the pound at $1.2953.
Implications for Nigeria’s Forex Market
The continued volatility in the global and local currency markets, along with ongoing efforts by Nigeria’s central bank to stabilize the forex market, highlights the challenges facing the country’s economy.
The Naira’s depreciation at the official window, paired with the rising demand for foreign currency, underscores the need for sustained measures to increase foreign exchange liquidity and stabilize the local currency. As Nigeria navigates these challenges, partnerships with institutions like the IFC may play a crucial role in mitigating foreign exchange risks and providing much-needed liquidity for businesses.
In the meantime, the outlook for the Naira remains uncertain, with fluctuations in the global U.S. Dollar and domestic economic conditions expected to continue influencing its value in the short to medium term.
