Can Nigeria stem naira fall?

Nigeria's currency, the naira, has once again begun a downward spiral against the US dollar in the parallel market, undoing the gains it had made earlier in the week. Dipo Ajayi, Head of fixed income and forex market at Chapel Hill Denham, joined CNBC Africa to discuss the current state of the naira and potential strategies to address the situation. The naira, which had been trading between 570 and 570 against the greenback earlier in the week, is now hovering around 1,000 to 1,120 against the US dollar at the parallel market. This significant devaluation raises concerns about the stability of the naira and prompts questions about the currency's true value and how deep its fall may go. Ajayi pointed out that many experts believe the naira should trade within the range of $809 to $1 based on purchasing power parity valuations. Major foreign entities like JP Morgan and Bank of America have also highlighted similar valuations, indicating that the naira may have been undervalued for an extended period. While some attributed the recent rebound in the naira to the Central Bank of Nigeria's clearing of FX backlogs, Ajayi emphasized that other factors also played a role in the currency's temporary appreciation. The removal of certain items from the parallel market to the official market helped alleviate pressure, while the issuance of high-yield homo bills created attractive investment opportunities, drawing in investors and reducing speculation on the naira. Additionally, the Central Bank's efforts to clear obligations further stabilized the market, although the distribution of funds primarily benefited tier two banks over tier one banks. Despite this initial focus on foreign banks, Ajayi expressed optimism that the Central Bank would progressively address the obligations of local banks and maintain its interventions to support the currency. The Central Bank's actions, including homo bill issuances and obligation clearances, have had a tangible impact on the market, although some retracement was expected after the initial surge in the naira's value. Ajayi highlighted the attractiveness of high-yield investment opportunities compared to speculative bets on the naira's fluctuations. The scarcity of cash in the market also raised concerns about restrictions on bank customers' access to funds. While the Central Bank assured that it had adequate liquidity to meet obligations, limitations on cash withdrawals caused inconvenience for some customers. Ajayi urged vigilance in monitoring the Central Bank's cash management and emphasized the importance of maintaining adequate cash flow to prevent shortages. Looking ahead to the November meeting of the CBN, Ajayi anticipated a more hawkish stance from the new CBN governor, signaling potential interest rate hikes to combat inflationary pressures. The governor's recent policy statements indicated a cautious approach, likely leading to a significant increase in the benchmark interest rate to address rising inflation numbers. Despite the current freeze on pump prices and subsidy removal, inflation is expected to rise to around 27.2 to 27.3 percent in October, reflecting ongoing economic challenges and policy adjustments. As Nigeria grapples with currency devaluation and inflationary pressures, the Central Bank's interventions will play a crucial role in stabilizing the economy and restoring confidence in the naira.