Will Nigeria's expected $10bn FX inflow ease market concerns?

Nigeria's former President Olusegun Obasanjo has called for diversification of the country's economy to boost foreign exchange earnings. Analysts are urging clarity on the expected $10 billion influx into the Nigerian economy in the coming weeks to ease market concerns. Kingsley Nwaiwu, Head of Consumer Sector, Global Sales at Stanbic IBTC Bank, shared valuable insights into the developments in Nigeria's FX market during an interview on CNBC Africa. The Nigerian Naira has been experiencing continuous weakening, creating uncertainty and instability in the foreign exchange market. The Minister of Finance has announced the upcoming arrival of $10 billion, aiming to address the ongoing FX illiquidity issue. Nwaiwu highlighted the importance of clarifying the sources of these funds to restore market confidence. He mentioned that the expected influx might include two tranches of forward sales and additional support from the Middle East. The funds are intended to clear existing backlogs and sustain future FX flows. The backlog includes forward contracts and funds trapped in the system, with estimates ranging from $6 billion to $10 billion. As discussions revolve around resolving these issues, attention turns to the fair value of the Naira once the backlog is cleared. Nwaiwu believes that sustaining liquidity in the FX market is crucial to addressing the undervaluation of the Naira. The parallel market has become a focal point for FX trading due to the shortage of liquidity in the official market. He acknowledged concerns about speculative activities affecting the Naira's value and emphasized the need for regulatory clarity and framework to combat illegal trading. The recent executive orders signed by the President aim to formalize cash transactions and curb unauthorized FX trading activities. Nwaiwu anticipates regulatory interventions in the parallel market to mitigate risks associated with unregulated trading practices. He advocates for a free-floating Naira in the official space to enhance market transparency and efficiency. However, challenges remain, particularly regarding settlement risks in non-deliverable OTC FX futures contracts. The fluctuating Nafex fixings pose additional concerns for the Central Bank, impacting settlement amounts and financial stability. Nwaiwu emphasized the importance of monitoring these developments closely amid ongoing market dynamics.