Naira Reaches Two-Year Peak Against the Dollar Amid Robust FX Inflows
The Nigerian naira has achieved one of its most robust positions in almost two years, closing at 1,347.78 per dollar in the official market on Monday, according to a macroeconomic update by CardinalStone. This significant appreciation marks a notable milestone for the currency, reflecting enhanced liquidity conditions within the foreign exchange market. Year-to-date, the naira has strengthened by 6.9 percent in the official window, underscoring a positive trend in Nigeria's economic landscape.
Persistent Gap Between Official and Parallel Markets
Despite these gains, a disparity persists between the official and parallel market rates. Initially, the parallel market traded at a 5.7 percent premium, which later narrowed to approximately 3.2 percent following renewed foreign exchange interventions by the Central Bank of Nigeria (CBN). CardinalStone highlighted that this shrinking spread indicates stronger liquidity in the official market relative to the parallel segment, suggesting improved market dynamics.
Central Bank's Strategic Measures to Boost FX Supply
Last week, the apex bank authorized licensed Bureau de Change (BDC) operators to purchase foreign exchange through authorized dealers at prevailing market rates. Each BDC is permitted to buy up to $150,000 weekly, subject to stringent Know-Your-Customer requirements. To discourage hoarding, operators must offload unused balances within 24 hours, and cash transactions are capped at 25 percent of total trades, with settlements routed through licensed financial institutions.
With 82 licensed BDCs, the potential monthly foreign exchange supply to this segment could reach around $50 million. However, this volume remains well below the over $1 billion supplied monthly before the COVID-19 pandemic. According to CardinalStone, this reduced volume reflects improved foreign exchange market conditions that have curbed speculative demand and redirected most corporate foreign exchange needs to the official window.
Impact on Retail FX Pressure and Market Premium
The renewed supply has alleviated retail foreign exchange pressure and contributed to compressing the parallel market premium. This development is crucial for stabilizing the currency and fostering a more predictable economic environment. Analysts have noted that sustained currency appreciation could prompt foreign investors to rebalance their portfolios, given Nigeria's attractive carry trade among emerging and frontier markets.
Potential Risks from Foreign Portfolio Investment
Nigeria continues to draw substantial foreign portfolio investment (FPI), estimated at $12 to $14 billion in outstanding positions. If many 2025 inflows entered the market at around 1,500 naira per dollar, a strengthening of the naira to between 1,200 and 1,250 naira per dollar could generate currency gains of about 22.4 percent. Such returns may heighten the risk of portfolio exits, particularly as political uncertainties build ahead of the next general elections, posing challenges for long-term economic stability.
