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By Chinwendu Obienyi
As the second half of 2024 progresses, economic experts’ projections for the naira are expected to keep the Federal Government and the Central Bank of Nigeria (CBN) on high alert. These projections underscore the need for preparedness against upcoming challenges and uncertainties in the currency market.
Following the removal of the rate cap at the Investors and Exporters’ (I&E) window last year, the naira has experienced significant depreciation. This policy shift allowed the naira to float freely, resulting in a sharp decline in its value. The exchange rate exceeded N700/$1 at the I&E window, now referred to as the Nigerian Autonomous Foreign Exchange Market. After the FMDQ FX market rates pricing methodologies were reviewed, the naira, which started 2024 at N988.46/$1 (January 2, 2024), plummeted to N1,665.50/$1 by the end of February.
The situation was even more severe in the parallel markets, where increased currency speculation drove the naira from N1,190/$1 to N1,890/$1. However, the market saw some recovery as the CBN intensified its monetary policy tightening measures through various circulars aimed at reducing currency speculation and increasing yields on naira-denominated assets. Additionally, the CBN cleared all valid FX backlogs, estimated at $4.60 billion.
To further stabilise the market, the CBN reintroduced Bureau De Change (BDC) operators into its FX framework and significantly increased its interventions across different market segments, including banks and BDCs. Despite these efforts, the naira’s appreciation was short-lived due to persistent demand pressures, a decline in Foreign Portfolio Investment (FPI) inflows, and fewer CBN interventions. By the end of May, the naira had appreciated to N1,485.90/$1 but slightly declined to N1,487.75/$1 by June 26, 2024. Despite a remarkable surge in FX turnover, reaching $1.03 billion over a recent weekend and a weekly increase in the nation’s reserves by $507.09 million to $35.28 billion, the naira still slumped to N1,563.80/$1. This depreciation has raised concerns about the naira’s value by the end of the year.
Financial market experts have highlighted that the sustained depreciation of the naira will keep both the FG and the CBN vigilant as they navigate the economic impacts. High inflation, driven by the removal of fuel subsidies and the devaluation of the naira, remains a significant concern. While inflation is forecasted to moderate, it will likely stay above the CBN’s target range, affecting production costs and investor confidence.
In its H2 2024 outlook report titled “Bridging Reforms to Recovery,” Cordros Research projected that the naira could trade within the N1,400/$1 – N1,500/$1 range by the end of the year. This projection is based on the CBN maintaining monetary tightening measures and FX reforms, keeping interest rates elevated, the moderate impact of ongoing geopolitical tensions in emerging markets, sustained CBN intervention in the FX market, average domestic oil production, and a cut in global interest rates in H2 2024.
The report also outlined a bear-case scenario where the naira could depreciate to N1,500/$1 – N1,600/$1 if adverse conditions prevail. Conversely, in a bull-case scenario, the naira could appreciate to N1,300/$1 – N1,400/$1. This optimistic outlook assumes significant increases in oil production and exports, substantial borrowing from the Eurobond market, and a sustainable rise in monthly FPIs to pre-pandemic levels.
Johnson Chukwu, Founder of Cowry Asset Management Limited, emphasized that in the absence of market distortions amid current volatility, further stability in the naira’s exchange rate is expected. He noted that the CBN’s policy pronouncements aimed at attracting foreign currency inflows would play a crucial role.
Chukwu stated that the naira’s performance in H2 2024 would depend on various factors, including demand for FX and supply from the CBN. While the CBN is likely to maintain a tight monetary policy stance, exerting downward pressure on the local currency and limiting liquidity levels in the FX market, the naira could rebound significantly if oil production improves, subsidies are eliminated, and local sourcing of oil for domestic refining begins in earnest. Chukwu projected a support level of N1,700/$1 for FY 2024, with potential for significant recovery under favorable conditions.
