Naira: Nigeria’s journey to price discovery

The Nigerian naira continues to face challenges as it trades around 1,300 against the US dollar at the official market. Data from the Central Bank of Nigeria (CBN) reveals that the country's currency in circulation has surged to 3.87 trillion naira by the end of March. Kingsley Nwaiwu, Head of Consumer Sector Sales at Stanbic IBTC, shed light on the FX trading patterns, the impact of CBN's reforms, and Nigeria's efforts to boost dollar flows. Nwaiwu highlighted the recent fluctuations in the naira's value against the greenback, noting that there was a period of appreciation towards sub-1,100 levels driven by an influx of dollar inflows from foreign portfolio investors. However, geopolitical tensions, such as the situation between Israel and Iran, led to a risk-off sentiment among investors, resulting in a sell-off of nairas and a shift towards safe-haven assets like the US dollar. Consequently, supply dwindled, causing the naira to weaken to 1,390 to 1,400 levels. To address the situation, the CBN conducted an Omo auction to mop up liquidity from the system, selling approximately 260 billion naira. Nwaiwu emphasized the importance of offering attractive rates in auctions to maintain investor interest, especially from foreign entities seeking profitable investment opportunities. The need for continued borrowing was also discussed, with the government borrowing less than 2 trillion naira in the first quarter, leaving room for further debt issuance. The conversation also touched on the policy tightening stance adopted by the CBN to promote market stability and recovery. While the tightening measures have had some positive effects, the rise in money circulation, currently at 3.87 trillion naira, poses a challenge. Nwaiwu expressed concerns about the cybercrime levy imposed by the central bank, which could deter digital banking adoption and hinder efforts to bring unbanked funds back into the formal banking system. Regarding the upcoming Monetary Policy Committee (MPC) meeting, attention was drawn to the need for a comprehensive strategy to manage money supply and encourage banking sector participation. Nwaiwu suggested potential concessions on the cybercrime levy to incentivize digital transactions and facilitate the flow of funds back into the banking system. In conclusion, the ongoing fluctuations in the naira's value underscore the impact of external factors like geopolitical tensions and foreign investor sentiment on Nigeria's currency. As the country navigates these challenges, effective monetary policies and strategic initiatives will be crucial in stabilizing the foreign exchange market and promoting economic growth.