Despite multiple interventions by the Central Bank of Nigeria (CBN) to stabilize the foreign exchange market, Fitch Ratings has flagged ongoing instability and uncertainty. This contrasts with a recent report by the International Monetary Fund (IMF), which observed signs of naira stability attributed to interest rate hikes and efforts to clear outstanding FX obligations.
In its Global Financial Stability Report, the IMF praised CBN’s policy actions, stating, “Rate hikes and the clearing of overdue domestic central bank foreign exchange obligations have helped the naira show more signs of stability.” However, Fitch’s latest rating presents a more cautious view, noting that recent measures may not be sufficient to address liquidity and stabilize the FX market fully.
Fitch highlighted CBN’s introduction of an electronic FX matching platform scheduled for December 1, 2024, aimed at providing real-time intra-day pricing and promoting transparency. The CBN has also raised the monetary policy rate five times since February, accumulating an 850 basis point increase to curb inflation and support the naira. Yet, Fitch noted that the market remains unsteady and awaits a test of exchange rate flexibility.
Further, Fitch reported Nigeria’s gross FX reserves rose to $39 billion in mid-October, up from $32.1 billion in mid-April, supported by official disbursements, remittances, portfolio inflows, and an improved trade balance. Despite this growth, Fitch warned of uncertainty over net reserves, estimating that about a quarter consists of FX swaps with local banks, which may contribute to future volatility.
CBN Governor Olayemi Cardoso recently spoke on the gradual restoration of confidence in the naira. He attributed this to the central bank’s orthodox monetary policies aimed at transparency and enforcing policies to prevent market manipulation. “The CBN doesn’t determine the exchange rate; the fundamentals do,” Cardoso said, emphasizing that the apex bank’s role is to support a stable market environment.
However, the exchange rate remains high, with the naira trading above N1,600. Observers noted an initial improvement in November, with the naira gaining against the dollar in both official and parallel markets. At the official rate, the naira appreciated from N1,675.49 to N1,666.72 per dollar on November 1, while at the black market, it rose from N1,750 to N1,735.
Despite these gains, the weakened naira continues to impact the Nigerian private sector. The latest Purchasing Managers’ Index (PMI) by Stanbic IBTC Bank indicated a drop to 46.9 in October, marking a 19-month low. Stanbic’s Head of Equity Research for West Africa, Muyiwa Oni, linked this downturn to intense inflation and rising fuel and transport costs driven by currency depreciation. Oni warned that high interest rates, alongside currency pressures, may constrain non-oil sector growth, though improved oil production could provide some economic relief.
In an effort to stabilize the FX market, the CBN has announced plans to launch an Electronic Foreign Exchange Matching System (EFEMS) by December 1, 2024. This system will allow for transparent interbank FX transactions and is expected to introduce a market-driven exchange rate accessible to the public. A two-week test run for EFEMS is scheduled for November, marking a significant step in Nigeria’s effort to reform its FX market.
