Naira Underbid even as Nigerian Net Positive Foreign Exchange Soar: Key Points for consideration in Sustaining Inflows




By Chinedu Okoye 




Policy Measures Paying Off:

The statement from CBN highlighted that both Capital importation and Diasporan Remittances drove this rise, as the former reached $6 billion in June.

The Bank implied that the series of tightening and market interventions to stem exchange rates has resulted in a net foreign exchange inflow increase to $25.4 billion, a 55% increase from the same period in 2023.

Naira Stays Underbid:

Whilst the statement from the Central Bank is positive, there are certain nuances to it that demand key considerations and could explain why the Naira is underbid in official markets (NAFEM).

The Central Bank's foreign reserves stand at $36.8 billion (Gross) and $35.9 billion (liquid). This means if you deduct the capital importation (of which at least $3 billion is in T-Bills) from the Gross, you are left with $30.8 billion and about $30 billion in liquid reserves. This means the increase in reserves from the positive net inflows is heavily driven by Foreign Portfolio Investments (into equities and mostly T-Bills), and Diasporan Remittances.

(Central Bank of Nigeria 30-day Moving Average Forex Reserves)

Structural changes in the Nigerian FX market have translated to better management of available FX supply and increases in policy rates attracting short-term foreign investors, which have been the major factors behind the increases in reserves. Currencies are driven by long-run fundamentals, and so the outlook for the Naira has kept it at the N1500-N1600/$1 range.



Sustaining Net Positive Foreign Exchange Inflows:

Longer-term financing and debt management is crucial to sustaining net positive inflows in the near term, barring any major foreign direct investment that may be in the works.

Because a lot is staked on short-term financing, the government would need to employ unconventional and innovative means of securing deficit financing at the lowest possible cost. Reform programs (e.g., changes in subsidy and exchange rate policy), though they may come with short-term costs to the consumer, relieve pressure on government spending.

These reforms if applied wisely could also improve the creditworthiness of Nigerian sovereigns in the international capital market. Diversifying credit sources and securing future lines of credit is key to accessing long-term capital.

The initiative of increasing accessible local debt from the Central Bank (10% of ways and means) and the $500 million USD 5-year bond issuance are both examples of unconventional and innovative means of financing referred to above. 

Such sustainable financing is key to maintaining and possibly increasing the current level of reserves through a series of positive net capital inflows over time periods.

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