Can naira recover ground?

The naira has finally shown signs of improvement against the dollar at the official foreign exchange market after weeks of continuous depreciation. Analysts have attributed the recent decline to a decrease in dollar liquidity within the official market. Dipo Ajayi, the Head of Fixed Income and FX at Chapel Hill Denham Securities, shed light on the current state of the naira and the factors influencing its performance. Ajayi highlighted the downward trend the currency has been experiencing since mid-April, with the exchange rate moving from 1,050 to 1,500 currently. He pointed out that the diminishing liquidity in the market, dropping from 5.9 billion in February to 1.7 billion in May, has contributed to the ongoing slide. Foreign investors' cautious approach towards investing in the Nigerian market has also played a role in the dwindling liquidity, as uncertainty persists among these investors. Despite efforts by the Central Bank of Nigeria (CBN) to encourage inflow of foreign exchange by granting approval to 14 new international money transfer operators, challenges still remain. Ajayi emphasized the importance of addressing issues beyond the central bank's control, such as fiscal policy gaps and security concerns, to attract more foreign investments. Moreover, the recent inflation figures indicate that Nigeria is grappling with stagflation, characterized by high inflation, low growth, and unemployment challenges. Ajayi expressed optimism regarding the inflation rate, which came in slightly lower than expected at 33.69%. He highlighted the lag effect of monetary policy decisions and suggested that the CBN might continue to tighten its policy rate, possibly with a 100 basis points rate hike, to curb inflation. However, he cautioned against excessive rate hikes, as it could have adverse effects on production costs and ultimately lead to a counterproductive outcome. Addressing the demand-supply dynamics of the FX market, Ajayi predicted a short-term improvement in the naira's performance. He pointed out upcoming inflows totaling around $10 billion from various sources, including World Bank loans and diaspora funding, which could help stabilize the currency. Additionally, the reduced demand for certain imports like digital goods and the government's plan to sell PMS in the market could alleviate the pressure on FX reserves. Overall, while some positive developments are on the horizon, cautious optimism is advised as Nigeria navigates through its economic challenges.