Due to the ongoing pressure from dollar illiquidity on the naira, the Nigerian Autonomous Foreign Exchange Market – NAFEM, is expected to register its lowest foreign exchange (FX) turnover in five months in June 2024.
With one trading day left, FX turnover for June 2024, was $3.14 billion as of June 27.
Compared to the $4.61 billion that was exchanged in the previous month, this is a significant reduction.
Similarly, month-to-date FX turnover at the official market has averaged $196.46 million per day, a 6.2% decrease from the average of $209.39 million recorded in May.
This is based on information from FMDQ that analysts at The News Chronicles are currently tracking.
In parallel, during the last two weeks, the naira has steadily lost value concerning the US dollar, hitting a monthly low of N1,510.1/$ on Thursday.
Compared to averages of N1,435.87/$1 in May and N1,244.66/$1 in April 2024, the naira has generally trended lower, trading at N1,486.63/$1 in June.
The Central Bank of Nigeria (CBN) has enacted a number of policies and reforms aimed at stabilizing the market and achieving price discovery for the naira, but the decline in the Nigerian foreign exchange market continues.
The ongoing depreciation of the naira and the decreased foreign exchange turnover highlight the serious liquidity issues that the Nigerian economy is currently confronting.
Notably, the CBN hiked the Monetary Policy Rate (MPR) by 750 basis points in total between January and June 2024 in an effort to draw in foreign portfolio investors and combat the rising rate of inflation.
This came after a February call between international portfolio investors and CBN Governor Yemi Cardoso.
As a result, high yields have been seen in the fixed-income and money market sectors for bonds, OMOs, and bills since then. However, FX liquidity is still a big problem for the Nigerian foreign exchange market due to high demand and little supply, which causes the value of the local currency to steadily drop.
In the meantime, N190.82 billion in foreign portfolio investments were made in Nigerian stocks by foreign portfolio investors between January and May 2024, according to data derived from the country’s stock market.
Conversely, a net deficit of N76.65 billion remains after a total of N267.47 billion has been repatriated from the market. This suggests that a large amount of hot money is leaving Nigerian borders at the same rate as it is entering the country in the form of foreign private investors (FPIs).
Increasing FX outflows
Nigeria has witnessed a notable surge in foreign exchange (FX) expenditure in the past several months, despite the restricted availability of FX within the nation. The nation spent more than $3.31 billion on foreign payments between January and May of this year, a 31% increase over the same time in 2023.
Upon deeper inspection of the individual components of this expenditure, $279.99 million was accounted for by letters of credit related to the importation of visible commodities.
In addition, $841.37 million was utilized for direct remittances, indicating the continuous need for foreign exchange for transfers for both personal and commercial purposes.
Nonetheless, the largest share of the spending was spent on $2.19 billion in debt servicing and payments throughout this time.
This increase in foreign exchange expenditure despite supply constraints highlights Nigeria’s economic challenges. The nation’s FX liquidity situation is still being strained by rising debt servicing costs and the requirement to import necessities.
Positively, as of June 26, 2024, Nigeria’s foreign reserves increased to $34.07 billion from $32.69 billion at the start of the month, marking the highest level in more than three months.
This increase might be partially explained by the Central Bank of Nigeria’s (CBN) lessening of its intervention in the foreign exchange market and by higher export revenues as a result of higher crude oil output.
Reserves have grown as a result of the CBN’s strategy of restricting its FX market operations, which reflects a more cautious approach to managing the nation’s foreign exchange. Furthermore, increased production of crude oil has supported export earnings, which has made a substantial contribution to the increase in reserves.
This increase in foreign reserves might boost investor confidence in Nigeria’s financial stability and act as a cushion against economic shocks.
Additionally, it gives the CBN more flexibility in controlling the exchange rate and bolstering the naira, which has been under a lot of strain lately.
But maintaining this upward trend will call for further work to increase export revenue, diversify the economy, and uphold responsible foreign exchange management practices.
