As of June 2024, the Nigerian Autonomous Foreign Exchange Market (NAFEM) is poised to experience its lowest foreign exchange (FX) turnover in five months, highlighting ongoing dollar liquidity challenges impacting the naira.
As of June 27th, 2024, FX turnover for the month totalled $3.14 billion, with only one trading day remaining. This marks a significant decrease from the $4.61 billion exchanged in the previous month. On a daily average, FX turnover stood at $196.46 million in June, down by 6.2% compared to May’s average of $209.39 million, according to data from FMDQ tracked by Nairalytics.
Concurrently, the naira has depreciated steadily against the US dollar, hitting a monthly low of N1,510.1/$ on Thursday. Throughout June, the naira averaged N1,486.63/$1, compared to N1,435.87/$1 in May and N1,244.66/$1 in April 2024.
Despite the Central Bank of Nigeria’s (CBN) efforts to stabilize the FX market and achieve price discovery for the naira through various policies and reforms, including multiple Monetary Policy Rate (MPR) hikes totalling 750 basis points from January to June 2024, challenges persist. These measures aim to combat rising inflation and attract foreign portfolio investors (FPIs) following engagements initiated by CBN Governor Yemi Cardoso in February.
However, FX liquidity remains constrained due to high demand and limited supply, exacerbating the decline of naira. As a result, the fixed-income and money market sectors have seen elevated yields across Treasury Bills (TBills), Open Market Operations (OMO), and Bond auctions.
Examining foreign portfolio investments in Nigerian equities reveals mixed outcomes. N190.82 billion was invested between January and May 2024, but N267.47 billion was repatriated, resulting in a net deficit of N76.65 billion. This underscores the volatility and fluctuating fortunes of hot money flows into and out of Nigeria.
Meanwhile, despite constrained FX supply, Nigeria’s FX spending surged to over $3.31 billion between January and May 2024, a 31% increase from the same period in 2023. Significant expenditures were allocated to debt servicing, payments, imports, and remittances, reflecting persistent economic pressures.
On a positive note, Nigeria’s foreign reserves surged to $34.07 billion as of June 26, 2024, the highest level over three months. This uptick, attributed to reduced CBN interventions and increased crude oil exports, bolsters economic resilience and investor confidence in Nigeria’s financial stability.
Maintaining this positive trajectory hinges on sustained efforts to boost export earnings, diversify the economy, and implement prudent FX management strategies. These measures are critical for navigating ongoing economic challenges and ensuring long-term stability in Nigeria’s FX market and the broader economy.
