Can naira sustain positive run in 2025?
In January 2025, the naira experienced a remarkable 4.14 per cent appreciation, strengthening by 63 naira and 72 kobo against the US dollar. This marks the best performance for the currency since June of last year, closing the month at 1,474 naira and 78 kobo per dollar. With the naira showing strong signs of resilience, Kingsley Nwaiwu, Head of Consumer Sector Sales at Stanbic IBTC, joins CNBC Africa to explore the factors driving this performance and what it means for the broader economy.
Tue, 04 Feb 2025 14:14:23 GMT
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AI Generated Summary
- Monetary reforms and foreign investor inflows have boosted the naira's strength in the FX market.
- Complementary fiscal measures are needed to address structural issues and attract foreign direct investment.
- The extension of access to the FX window for Bureaux de Change aims to reduce speculation, but challenges remain in bridging the official and unofficial FX rates.
In the dynamic world of currency markets, the naira has been making headlines with its impressive performance in January 2025. The Nigerian currency experienced a significant appreciation of 4.14 per cent against the US dollar, strengthening by 63 naira and 72 kobo. This marked the naira's best performance since June of the previous year, closing the month at 1,474 naira and 78 kobo per dollar. The currency's resilience has raised questions about the factors driving this positive trend and its implications for the broader economy.
The naira's recent success can be attributed to several key factors, according to Kingsley Nwaiwu, Head of Consumer Sector Sales at Stanbic IBTC. Nwaiwu highlighted the impact of monetary reforms in restoring market confidence, particularly in the foreign exchange (FX) and interest rate spaces. He pointed out that foreign portfolio investors played a significant role in boosting FX supply by investing in interest rate instruments. Additionally, the issuance of OMO bills by the central bank attracted substantial FX inflows, with billions of dollars exchanged in the market.
The influx of 'hot money' from foreign investors has bolstered the naira's position and provided short-term stability. However, Nwaiwu emphasized the need for complementary measures on the fiscal side to address structural issues in the economy. He underscored the importance of driving real economic growth through initiatives that attract foreign direct investment (FDI). This includes creating a conducive business environment, ensuring security, and implementing sound tax policies to enhance investor confidence.
On the retail end of the FX market, the Central Bank of Nigeria (CBN) extended access to the FX window for Bureau de Change operators, allowing them to purchase $25,000 weekly from banks. Nwaiwu noted that while this move aimed to reduce speculation and enhance liquidity, more needs to be done to bridge the gap between the official and unofficial FX rates. The ongoing recapitalization exercise for BDCs is part of the CBN's efforts to strengthen the sector and mitigate currency speculation.
Despite the positive developments, challenges remain in curbing the demand for foreign currency in the informal market. Nwaiwu highlighted the prevalence of exchange control regulations that drive small and medium-scale enterprises (SMEs) to seek dollars at a premium outside the formal banking system. Encouraging these SMEs to conduct FX transactions through banks could help reduce the pressure on the naira and discourage hoarding of foreign currencies.
Looking ahead, the path to sustained naira strength lies in a coordinated approach that combines monetary interventions with long-term fiscal reforms. While the recent performance reflects progress in restoring market confidence, achieving lasting stability will require comprehensive measures to enhance economic competitiveness and attract sustainable FDI. As Nigeria navigates its currency dynamics, the resilience of the naira in 2025 sets the stage for a more robust and diversified economy.