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By Chinwendu Obienyi
The total inflows into the Nigerian Autonomous Foreign Exchange Market (NAFEM) declined to a five-month low of $1.92 billion in July, representing a 4.4% month-on-month decrease from the $2.01 billion recorded in June, data from FMDQ revealed at the weekend.
This drop was largely due to a significant reduction in foreign inflows, which fell by 51.4% month-on-month to $243.30 million from $500.20 million in June. The decrease in foreign inflows was driven by weaker foreign portfolio investments, which declined by 58.8%, and other corporate inflows, which dropped by 32.1%, despite a substantial rebound in foreign direct investments (FDIs) which surged by 1,705.9%.
The weak foreign inflows can be attributed to limited foreign investor participation in the domestic market, which is influenced by concerns over currency conversion and market risks associated with tight foreign exchange (FX) liquidity and the volatility of the naira. In contrast, domestic participation in the market increased significantly, growing by 77% as per the Nigerian Exchange Limited (NGX)’s report for June.
According to the NGX’s Domestic and Foreign Portfolio Investment Report, total transactions executed between the current and prior month (May 2024) revealed that total domestic transactions increased by 17.85% from N231.10 billion in May 2024 to N272.36 billion in June 2024. However, total foreign transactions decreased by 33.87% from N124.28 billion (about $83.78 million) to N82.19 billion (about $55.88 million) between May 2024 and June 2024.
Hence, inflows from local sources (87.4% of total transaction value) increased by 11.1% m/m to $1.68 billion (June: $1.51 billion) supported by larger inflows from the CBN (+348.1% m/m) and individuals (+12.3% m/m) segments, while inflows from non-bank corporates (-6.9% m/m) and exporters (-4.5% m/m) declined.
Reacting to the development, financial experts noted that over the short term, they expect FX liquidity conditions to remain frail, mainly due to weak CBN intervention, adding that amid FX liquidity concerns, the elevated global interest rates and geopolitical uncertainties may keep foreign inflows subdued in the near term.
Meanwhile, Nigeria’s FX reserves reached its highest point since February 2023, as the gross reserve level increased by $290.77 million in one week to $36.80 billion (July 31, 2024). However, the naira depreciated by 0.5% week-on-week (w/w) to N1,617.08/$1 at the NAFEM, amid the CBN selling $42.00 million to authorised dealers on Thursday.
Total turnover at the window (as of 01 August) decreased by 34.7% week-to-date (WTD) to $871.78 million, with trades consummated within the N1,500.00/USD – N1,645.00/USD band.
In the forwards market, the naira rates on the 1-month (N1,625.39/USD) and 1-year (N1,922.32/USD) contracts were unchanged, while it declined on the 3-month (-0.3% to N1,684.47/USD) contract. Elsewhere, the rate on the 6-month (+0.2% to N1,758.16/USD) contract increased.
FX liquidity had during the week remained tight following a muted intervention from the CBN, which underpinned the increased pressure on the naira.
“Looking forward, given the CBN’s intention to resume a Retail Sale Dutch Auction on 7 August due to the increased FX demand pressure, we anticipate an improvement in FX liquidity, potentially reducing the volatility in the naira in the short term”, Cordros Research said in an emailed note.
