Naira stability: Nigerian Currency Appears to Have Found Solid Ground

Danelee Masia, Deutsche Bank's chief economist for South Africa and Sub-Saharan Africa, expressed enthusiasm about the naira's trajectory

Naira Will Stabilise at ₦1600/$

After enduring a dramatic fall against the US dollar, Nigeria’s naira appears to be regaining its composure, trading within a tight range for the past month. This newfound stability has ignited a sense of optimism among analysts who now see a sustained period of steadiness for the currency.

The naira experienced a significant depreciation of 70% since Nigeria relaxed its foreign exchange controls in 2023, with a particularly sharp drop a year ago. However, recent data paints a more promising picture, with the naira stabilizing between 1,520 and 1,550 to the dollar since early December.

Danelee Masia, Deutsche Bank’s chief economist for South Africa and Sub-Saharan Africa, expressed enthusiasm about the naira’s trajectory. “We’re quite bullish on the naira, anticipating it to stabilize around 1,500 or perhaps even appreciate further,” she commented to Bloomberg TV. She highlighted the recent boost in Nigeria’s dollar reserves from a $2.2 billion Eurobond issued in early December, though she cautioned about the currency’s sensitivity to oil price fluctuations.

The depreciation of the naira was part of a broader economic strategy initiated by President Bola Tinubu in May 2023, when the country moved away from its fixed exchange rate policy. This shift aimed to correct economic distortions caused by an artificially high exchange rate, which had previously stifled export competitiveness.

The change has been well-received by foreign investors and international bodies like the IMF, though it initially spiked import costs and intensified the cost of living for Nigerians. Despite occasional interventions by the Central Bank of Nigeria (CBN) to inject liquidity, the current stability is not seen as a direct result of these actions but rather from the influx of foreign capital.

Ayo Salami from Emerging Markets Investment Management Ltd. in London pointed out that monthly foreign direct investments into Nigeria are now at $2.5 billion, dwarfing the CBN’s contributions of $280 million. “Given that most of the forex flows are independent of CBN actions, we can consider the current rate as a true market reflection,” he explained. He further noted that Nigeria’s high interest rates, currently at a historic peak of 27.5%, are a significant draw for foreign investors.

If these rates hold above 15%, Salami believes this would be enough to maintain the flow of foreign investment, stabilizing the currency. He considers the naira’s current valuation around 1,550 per dollar as a genuine equilibrium of market forces.

The CBN’s aggressive rate hikes are a response to inflation, which hit nearly 34.8% last month, the highest in almost three decades. Post-reform inflation has been driven by both the liberalization of currency controls and the removal of fuel subsidies, but the bank is committed to tightening policy further at its upcoming meeting on February 17-18.

Samir Gadio of Standard Chartered highlighted the naira’s recent anchoring, suggesting that high yields and an improving reform narrative could continue to attract investment into Nigeria in 2025, despite potential global economic challenges.

This cautious optimism around the naira’s stability reflects a complex interplay of domestic policy adjustments and the allure of high returns for foreign investors, setting the stage for what might be a more stable future for Nigeria’s currency.

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