Can Nigeria sustain FX liquidity drive?

Nigeria's foreign exchange market continues to experience significant inflows, with data from FMDQ showing a 10 per cent month-on-month increase in foreign exchange turnover in July to $7.39 billion. This surge follows reports from the Central Bank of Nigeria indicating a recorded remittance inflow of $553 million in the same month. Tajudeen Ibrahim, Director of Research and Strategy at Chapel Hill Denham, provided insights into the current state of the FX market in Nigeria and discussed the challenges and prospects ahead. Despite the increased inflows, the Naira remains relatively stable, hovering around 1.5 to 1.550 against the US dollar. Various factors contribute to this stability, including inflows from diaspora remittances, international money transfer operators, and positive policy responses from the Central Bank of Nigeria (CBN). However, concerns persist regarding the Naira's strength and the need for further measures to boost liquidity in the FX market. Ibrahim highlighted the importance of expanding the CBN's dollar sources to enhance market liquidity and sustain the positive momentum. He emphasized that policy responses and reforms have started yielding results, particularly in attracting foreign direct investments and increasing remittances due to policy adjustments. While the Naira's current trading range is seen between 1,400 to 1,600 in the next six months, Ibrahim remains optimistic that sustained inflows and strategic measures could drive the Naira towards a fair value estimation of 1,000 Naira to the dollar over the next 12 months. He underscored the significance of adopting import substitution strategies, especially in key sectors like oil and gas, to reduce foreign exchange outflows and enhance savings for the economy. Additionally, Ibrahim noted the correlation between the strength of the Naira, dollar availability, and Nigeria's manufacturing sector's performance. He emphasized the need for infrastructural development, energy supply stability, and support for local industries to improve manufacturing output and reduce dependency on imports. Ibrahim highlighted the pivotal role of the fiscal authority in complementing the CBN's monetary policy efforts. Looking ahead, he suggested that the CBN would continue to roll out policies to boost dollar inflows, citing the recent introduction of a domestic dollar-denominated bond program aimed at raising $2 billion. Expectations are high for innovative policy measures to sustain and enhance the current positive trends in the FX market. In conclusion, Ibrahim reminded the market participants that price fluctuations are inherent, and relative stability is crucial for market resilience and investor confidence. The FX market in Nigeria faces challenges and opportunities, and collaborative efforts between monetary and fiscal authorities are essential to navigate the evolving landscape.