The Naira has been gaining rapidly against the dollar in the last few days, reaching about 8.9% increase in the last one week. The currency had been unstable since it was floated by the President Tinubu administration over a year ago. However, in the past one week, it has witnessed a notable recovery from about 1,700/ $ to about 1,520/$.
The official market saw rapid gains in the exchange rate, while the parallel market presented an unpredictable situation as the Naira gained faster than dealers could sell. This is a sharp contrast with the trend witnessed for several months when the currency faltered to almost 1,800/$.
The resurgence of the currency can be attributed to different factors as explained here
Electronic Foreign Exchange Matching System (EFEMS)
The EFEMS is a system introduced by the Central bank of Nigeria to bring all the existing foreign exchange windows into a unified system. The Investors & Exporters (I&E) FX Window, the SME Window, and the Invisible Window will be merged into a single FX matching system. This is geared towards ensuring a harmonised FX system that will bring about transparency and make the FX operations as seamless as possible.
Also, by automating the foreign exchange system and ensuring a more efficient allocation of dollars, EFEMS is expected to curb market volatility and instil confidence among market players.
The new system also mandates a minimum trade value of $100,000 for all interbank FX transactions, making it hard for any speculative activities in the market.
This new system has created an effective way of tracking and monitoring by mandating banks to do real time reporting of all FX transactions while other authorised dealers must file report in 10 minutes. It requires buying request and selling prices to be displayed simultaneously to give a transparent account of every transaction.
With this, expert say, the CBN has been able to eliminate the manipulation of the market to a large extent, contributing to the resurgence of the Naira.
$2.2 billion Eurobond issuance
The recent Eurobond issuance by the Debt Management Office was over subscribed to by investors, indicating a growing confidence in government securities and an increased FX inflow for the country.
With this, there is more supply of dollar in the system to meet the growing FX demand while also easing off the pressure on the Naira.
The Eurobond had been issued to help the government create other revenue sources asides external borrowing to shore up the revenue base and address the 2024 budget deficit. However, the bond acceptance surpassed expectation as it was over subscribed, reflecting a growing belief that the government can address the economic challenges in the country.
Panic selling
As the Naira continues to rally against the dollar, there is concern among those holding the USD that it will crash further. This concern has led to panic selling among speculators who had hoarded the dollar in anticipation of further decline of the value of the Naira.
Now that the Naira seem to be recovering, some of these players are quickly selling their stock, contributing to the supply in the system. As supply outweighs demand, it is only natural for the Naira to gain strength even further.
Seasonal remittance inflow
The festive season often brings a surge in diaspora remittances from those returning to the country or Nigerians sending money back home to loved ones during to celebrate christmas.
This seasonal increase in dollar supply has further boosted FX market liquidity and eased pressure on the Naira.
Conclusion
Certainly the Naira has benefited from the CBN’s new trading system, increase in diaspora remittances and speculative selling by hoarders. This has bolstered the Naira putting it on a bullish part to recovery. However, the gains recorded might be temporary as there are several fundamental issues that must be addressed before Nigeria can have a stable and valuable currency.
This can only happen when there is a thriving export based economy, harnessing the potential in the non-oil sector and addressing the menace of crude oil theft. This is highly imperative so as to build on the success recorded so far.
