By Chinwendu Obienyi
Nigeria’s foreign exchange (FX) reserves have remained stable at $33.16 billion, a notable sign of economic steadiness despite the lack of significant fluctuations in the naira’s value and the surge in inflation.
This is coming after the naira appreciated by 0.1 per cent week-on-week (w/w) to close at N1,482.72/$1 at the Nigerian Autonomous Foreign Exchange Market (NAFEM). On the other hand, the naira closed at N1,480/$1 at the parallel market.
Data from the National Bureau of Statistics (NBS) revealed that headline inflation rose to a three decade high in May from 33.7 per cent recorded in April to 33.95 per cent.
Specifically, food prices rose due to increased costs for meat, fish and potatoes, which resulted into food inflation increased from 40.3 per cent in April to 40.66 per cent in May while core price growth, which excludes energy and agricultural products, accelerated to 27 per cent from 26.8 per cent, leading to concerns that the inflation might have been fueled by the naira’s rapid decline against the US dollar since June 2023.
The country’s FX reserves recorded accretion, as the gross reserves level increased by $273.77 million w/w to $33.16 billion. But, the total turnover (as of 13 June) at the market declined by 46.4 per cent week-to-date (WTD) to $683.83 million, with trades consummated within the N1,400.00/$1 – N1,505.00/$1 band.
According to reports, dollar supply by willing sellers and willing buyers surged by 97.6 per cent to $183.47 million on Friday from $92.68 million recorded on Thursday. The summary of the FX auction revealed that the intraday high closed weaker at N1,490 per dollar on Friday compared to N1,500/$1 quoted on Thursday.
In the forwards market, the naira rate was flat at the one-month (N1,500.00/$1) contract, but declined across the three-month (-0.2 per cent to N1,548.66/$1), six-month (-0.3 per cent to N1,617.29/$1) and one-year (-0.7 per cent to N1,761.62/$1) contracts.
Economic analysts say they are worried that the headline inflation might worsen naira prospects in the near terms. They however said the current position of the country’s FX reserves represents stability which is crucial for its financial health.
They further added that they anticipate a strengthening of the naira, given the World Bank’s approval of a $2.25 billion loan, of which a first tranche of the loan ($750.00 million, subject to request) is expected to follow, potentially supporting the CBN’s ability to boost FX liquidity.
For instance, analysts at Cordros Research said, “Whilst no inflows from the CBN were recorded in the week, we point out that the naira traded with less volatility primarily due to reduced demand pressure and moderate inflows from autonomous sources.
In the short term, we anticipate a strengthening of the naira, given the World Bank’s approval of a $2.25 billion loan, of which a first tranche of the loan ($750.00 million, subject to request) is expected to follow, potentially supporting the CBN’s ability to boost FX liquidity”.
Also speaking, an economic expert and a stockbroker, Charles Fakrogha, said that stable FX reserves ensure that Nigeria can meet its import obligations and service its foreign debt without depleting its reserves rapidly.
“This is essential for maintaining economic stability and investor confidence. Another thing is that by maintaining a stable currency and adequate reserves, the apex bank can better manage inflation because currency stability helps prevent cost-push inflation, where the cost of imports drives up prices.
Stable reserves provide a buffer that allows the government to plan more effectively for the future. This includes budgeting for infrastructure projects, social programs, and other developmental activities without the fear of sudden financial instability”, Fakrogha explained.