How reforms are driving naira gain

Nigeria's economic landscape has been under the spotlight recently, with Fitch Ratings commending the government for its swift reforms in the exchange rate framework. The ratings agency applauded the positive developments in the country, such as the FX liberalization and unification efforts. However, concerns about the lower degree of price discovery in the foreign exchange market have raised doubts about the sustainability of this positive momentum. Ayodeji Ebo, Managing Director at Optimus by Afrinvest, recently joined CNBC Africa to discuss these critical issues. Ebo highlighted the importance of understanding the context within which the ratings were assessed, noting that the data considered was up until June. Despite the challenges highlighted by Fitch, such as high inflation and low net FX reserves, Ebo remained optimistic about the country's outlook. One of the key areas of focus is inflation management, with Ebo emphasizing the need for collaboration between monetary and fiscal authorities to address the issue effectively. He noted that inflation, which is currently high, requires a holistic approach that combines both monetary and fiscal policy measures. The projection of a decline in inflation to 21% was seen as a positive sign for the economy. Another crucial aspect discussed was the supply of foreign exchange and the determination of the fair value of the Naira. Ebo stressed the importance of sustained efforts by the Central Bank of Nigeria (CBN) to clear backlogs and increase access to FX. He also highlighted the need for structural changes, such as restructuring maturing obligations and minimizing oil-related transactions, to enhance FX reserves. In light of recent market developments, Ebo pointed out a positive trend where the dollar has dropped below 1,000 Naira at the exchange rate. This improvement signals a potential path towards currency appreciation and economic stability if sustained supply and complementary policies are implemented. Overall, the outlook for Nigeria's economy remains cautiously optimistic, with the potential for further growth and stability in the coming years. The collaboration between monetary and fiscal authorities, coupled with strategic reforms in the FX market, is crucial to unlocking the country's economic potential. As Nigeria navigates through these challenges, the focus on price stability, FX supply enhancement, and inflation management will be key drivers of sustainable economic growth and development.