The US dollar continues to cede ground to the naira following positive market performance and Central Bank of Nigeria (CBN’s) reforms impact on the economy. Naira rebound has heightened currency risks for Nigerians storing wealth in dollars expecting sustained naira slide. Naira made whooping N145 gain in February prompting analysts’ warning to dollar savers to offload their holdings to avert further losses.

For long, dollar dominance has constituted major challenge for emerging markets and import-dependent economies like Nigeria where higher greenback valuation hinders macroeconomic indicators.

But after series of reforms instituted by the Central Bank of Nigeria (CBN) to prop up the naira and reduce dependence on the dollar, the local currency is finding its lost voice in the exchange rate market.

For instance, the naira recorded major comeback in February, positing one of its biggest wins in recent months.

The local currency, which opened February at N1,640 to dollar at the parallel market closed the month stronger at N1,495 to dollar, representing N145 gain. At the official market, the naira closed at N1,492 from N1,620 it started the month of February on.

Michael Nwadike, FX Analyst said dollar savers are losing in current naira rally and will record more losses as the greenback holders dump it in open market.

He said that the search for better returns on investment is universal but investors should equally consider risks associated with such investments.

According to him, investors looking to diversify their portfolio and protect their wealth against the repeated depreciation of the naira through investment in dollar-denominated assets should have a rethink in the face of ongoing naira rally.

Nwadike however, advised authorities to embrace more pro-market paths to encourage foreigners to take on more naira risks.

“There should also policies that will attract longer-term capital as opposed to fleeting hot monies. The promulgation and implementation of appropriate reforms, improvements in ease of doing business, provision of adequate infrastructure, and tilt to a more liberal currency regime are some measures that could be adopted,” he said.

According to him, the era of forex distortions in the domestic foreign exchange market came to an end after the Central Bank of Nigeria (CBN)-backed Electronic Foreign Exchange Matching System (EFEMS) began operations.

The implementation of the FX policy, came with diverse implications for all segments of the financial markets that deal on forex, including rebound in the value of the naira across markets.

“A stabilizing naira is good for everyone stabilizing at both the official markets, but sad over capital loses. This is not the time to hoard dollar because naira is fast finding its feet,” Olakunle Amos, FX trader based in Mushin Lagos.

A retired CBN Director, Prof. Jonathan Aremu, described the currency’s steady appreciation against the Dollar as a positive development.

Aremu, a Professor of International Economic Relations at Covenant University, is also a Regional Expert on Trade and Investment for ECOWAS.

Aremu called for increased production to sustain the Naira’s gains.

He urged the CBN to focus on boosting productive activity in the economy to maintain stability.

According to him, the apex bank should look beyond interest rates and consider other factors influencing production and liquidity.

“The quantity theory of money states that money supply and population value must equal price and transaction volume in the economy. If policy only targets money supply without increasing transactions, the expected appreciation of the Naira will not materialise. The economy needs a higher volume of goods and services. Many goods are available, but their prices depend on supply and demand,” he said.

President, Association of Bureaux De Change Operators of Nigeria (ABCON), Aminu Gwadabe, said he believed the apex bank remained committed to resolving the foreign exchange issues confronting the nation and as such has been working to manage both the demand and supply side challenges.

While admitting that there was huge demand pressure for foreign exchange to meet the needs of manufacturers as well as those for the payment of tuition, medical fees and other invisibles, he added that the monetary authority was strategizing to help Nigeria earn more stable and sustainable inflows of foreign exchange in the face of dwindling inflows from the oil sector.

Specifically, he noted that recent initiatives undertaken by the Bank such as the FX code policy, Electronic Foreign Exchange Matching System (EFEMS), had helped to increase foreign exchange inflow to the country.

On his part, CBN Governor, Olayemi Cardoso described EFEMS as one of the many gains of the exchange rate unification policy, expected to birth several other gains in the market operation.

He said the policy will not only put forex market distortions under check, eliminate speculative activities and instill transparency, but will also make it difficult for abuse in the market to persist.

Cardoso said an enabling policy environment has led to a doubling of monthly remittances from an average of $300 million in 2023 to nearly $600 million in August 2024.

“We are committed to further integrating the Nigerian diaspora into our financial system, exemplified by the introduction of the non-resident Bank Verification Number registration. We expect our financial institutions to develop products that not only enable the diaspora to support their families but also provide opportunities for savings and investment in Nigeria,” Cardoso said.

Cardoso said the current exchange rate for the naira does not reflect the true value of the local currency.

He said the current US dollar exchange rate reflects the price that the most desperate buyers are willing to pay, and this, in the apex bank’s view, does not represent the true market value of the naira.

The CBN boss said the apex bank expects that the introduction of the electronic marketing system will correct these distortions by enhancing price discovery process for the naira.

Additionally, he stated that the move will significantly boost the central bank’s oversight and integration capabilities, ensuring a more stable and transparent foreign exchange market.

Cardoso also said that an FX market defined solely by when and how the central bank buys or sells dollars is inadequate for the needs of a dynamic economy like Nigerians.

“Now is the time for banks to step up to their intermediation and market making responsibilities providing customers with the right solutions to run their businesses and manage risk effectively, ” he said.

Inflation decline raises hope on naira
The Comercio Partners, in its 2025 macroeconomic outlook, highlighted that the rebasing of Nigeria’s Consumer Price Index (CPI) to 2024 would also create statistical effects that could lower inflation figures.

Expectedly, Nigeria’s annual inflation rate dropped to 24.48 per cent in January, the National Bureau of Statistics (NBS) showed. The figure is well down from the previous month’s figure after the Nigeria’s Consumer Price Index (CPI) was rebased for the first time in more than a decade.

From the stabilisation of exchange rates, the normalisation of energy prices following the subsidy removal to improved liquidity in the forex market, the economy has what it takes to achieve price stability within the year.

The Comercio Partners reports, emphasised the importance of local refining capacity expansion, particularly with the launch of the Dangote Refinery. This development is expected to reduce the impact of exchange rate fluctuations on energy prices. By relying more on domestically refined petroleum, Nigeria is likely to see a reduction in energy price volatility.

This, combined with a more stable exchange rate, is expected to lower production and transportation costs, creating a positive ripple effect throughout the broader economy.

According to Ifeanyi Ubah, head of investment research and global macro strategist, “We expect headline inflation to decrease to around 15 percent in the first half of 2025, indicating a gradual return to economic stability.”

The report also emphasised the importance of local refining capacity expansion, particularly with the launch of the Dangote Refinery. This development is expected to reduce the impact of exchange rate fluctuations on energy prices. By relying more on domestically refined petroleum, Nigeria is likely to see a reduction in energy price volatility. This, combined with a more stable exchange rate, is expected to lower production and transportation costs, creating a positive ripple effect throughout the broader economy.

The need to tame inflation and sustain exchange rate stability also formed part of the key parameters that determined Monetary Policy Committee (MPC) decision to keep rates unchanged at its 299th meeting held last week in Abuja.

Accordingly, the Committee voted to hold the MPR constant at 27.50 per cent and retain all other parameters – Cash Reserve Requirement (CRR) for Deposit Money Banks (DMBs) and Merchants Banks at 50 per cent and 16 per cent, respectively; the asymmetric corridor around the MPR at +500bps/-100bps and the liquidity ratio at 30 per cent

IMF position on dollarisation

According to the International Monetary Fund (IMF) report, market participants defend their wealth by shifting to dollar savings under high and persistent inflation.

The Fund said the process of reversing citizens savings in dollars could be complex even after addressing the initial trigger, such as high inflation and exchange rate volatility.

The Fund said most economies operate with a foreign exchange (FX) – the dollar bias for international trade and finance invoicing.

“The optimal choice between domestic currency versus dollars will depend on the monetary framework and the benefits that each may offer as they co-exist as two currencies,” it said.

The IMF explained that in a highly dollarised economy, there is extended use of the exchange rate for price indexation (high real dollarisation and almost complete pass-through from depreciation to inflation). Forex is also used in foreign trade.

It said: “There is limited scope for fiat currency (tax payments, public expenditure, non- durable goods, and low- value transactions; extended forex use for durable goods, real estate, capital goods, and high-value transactions. Also, forex takes over the role of store of value as lending capacity in domestic currency becomes limited. Most loans become forex- denominated when forex bank deposits are allowed.”

Dollar holdings by central banks
Recent data from the IMF’s Currency Composition of Official Foreign Exchange Reserves (COFER) point to an ongoing gradual decline in the dollar’s share of allocated foreign reserves of central banks and governments.

Strikingly, the reduced role of the US dollar over the last two decades has not been matched by increases in the shares of the other “big four” currencies—the euro, yen, and pound.

Rather, it has been accompanied by a rise in the share of what we have called nontraditional reserve currencies, including the Australian dollar, Canadian dollar, Chinese renminbi, South Korean won, Singaporean dollar, and the Nordic currencies.

One nontraditional reserve currency gaining market share is the Chinese renminbi, whose gains match a quarter of the decline in the dollar’s share.

The Chinese government has been advancing policies on multiple fronts to promote renminbi internationalization, including the development of a cross-border payment system, the extension of swap lines, and piloting a central bank digital currency. It is thus interesting to note that renminbi internationalization, at least as measured by the currency’s reserve share, shows signs of stalling out.

ogododo:



https://dailytrust.com/naira-rally-puts-dollar-savers-at-risk-of-investment-losses/

Paraman:
If you like don't dump, keep on waiting for people telling you it will get to $/2000

walozanga:
Tunubu dogs start barking

Paraman:
If you like don't dump, keep on waiting for people telling you it will get to $/2000

walozanga:
Tunubu dogs start barking

1MILLIONLiGHTS:
As far as Dollar > Naira in value. It is never a loss in investment, only a reduction.

NOC1:


You are a squirrel they are hunting

Paraman:
If you like don't dump, keep on waiting for people telling you it will get to $/2000