In the past week, the Nigerian naira reversed some of its recent gains, depreciating against the United States dollar in both the official and parallel markets. At the close of trading, the naira weakened by 1.66% week-on-week, closing at 1,517.24 compared to 1,492.49 the previous week. Similarly, in the parallel market, the naira eased to an average of 1,520/, reflecting$BureauDeChange(BDC)operatorsreportedthatthenairalostasmuchasN70,closingat1,570/$ by the end of the week.

February’s Gains and March’s Challenges
The naira had closed February 2024 with an 8.5% month-on-month gain in the parallel market, settling at 1,490/. $On\; the\; official\; market,\; it\; closed\; at\; \$1,500$, marking a 1.7% month-on-month decline. Analysts had initially projected a positive outlook for the naira in March, barring any significant shocks. However, the currency faced renewed pressure due to increased demand for dollars from foreign portfolio investors (FPIs) and local corporations.

Factors Driving the Naira’s Depreciation
AIICO Capital Limited, in an investor note, attributed the naira’s depreciation to tight dollar liquidity and heightened demand from FPIs and local corporates. The firm noted that offshore demand remained strong, pushing exchange rates higher despite interventions from the Central Bank of Nigeria (CBN). CardinalStone, in its daily market report, echoed this sentiment, highlighting that pressure on the naira increased due to profit-taking actions by FPIs and local corporations. These actions offset the support provided by the CBN’s interventions in the interbank market.

CBN’s Role in Stabilizing the Naira
Analysts at Cowry Asset Management Limited emphasized that the CBN’s continued weekly interventions in the foreign exchange (FX) market would be crucial in determining the naira’s trajectory. With foreign reserves standing at $38.35 billion as of Thursday, the CBN has sufficient resources to provide a buffer for the naira. However, the short-term outlook suggests moderate market performance, with an improved supply of dollars potentially offering some relief for the local currency.

Optimism for March Amid Challenges
Afrinvest, in its Monthly Market Report, projected that the naira would maintain its positive performance across FX segments in March, supported by the CBN’s continued supply of dollars to BDCs and Deposit Money Banks (DMBs). However, this outlook hinges on the absence of adverse market shocks. Despite this optimism, experts have identified several challenges threatening the naira’s stability, including a mounting debt burden, a sustained decline in foreign reserves, and high inflation rates. These factors could undermine the potential gains of ongoing FX reforms.

Mounting Debt and Foreign Reserves Decline
Nigeria’s mounting debt burden remains a significant concern for the naira’s stability. The country’s debt profile has risen steadily, with servicing costs consuming a substantial portion of government revenue. This situation limits the government’s ability to invest in critical sectors and exacerbates fiscal pressures. Additionally, the sustained decline in foreign reserves poses a risk to the CBN’s ability to defend the naira. While the reserves currently stand at $38.35 billion, consistent outflows could erode this buffer over time.

High Inflation and Its Impact on the Naira
High inflation rates further complicate the naira’s stability. Inflation erodes purchasing power, increases production costs, and discourages investment. The CBN has implemented various monetary policies to curb inflation, including raising interest rates. However, these measures have had limited success, as structural issues such as supply chain disruptions, energy shortages, and insecurity continue to drive inflationary pressures.

Foreign Exchange Reforms and Their Limitations
The Nigerian government and the CBN have introduced several FX reforms to stabilize the naira and attract foreign investment. These reforms include the unification of exchange rates, increased transparency in FX transactions, and efforts to boost dollar inflows through remittances and export earnings. While these measures have yielded some positive results, their impact has been limited by external shocks, such as fluctuating global oil prices and internal challenges, including low non-oil export earnings.

The Role of Foreign Portfolio Investors
Foreign portfolio investors play a critical role in Nigeria’s FX market. Their inflows provide much-needed liquidity and support the naira. However, their actions are often influenced by global economic conditions and domestic policy stability. In recent weeks, profit-taking by FPIs has contributed to the naira’s depreciation, highlighting the volatility associated with portfolio investments. To attract sustained FPI inflows, Nigeria must address structural bottlenecks, improve ease of doing business, and maintain policy consistency.

Local Corporates and Dollar Demand
Local corporations are another significant source of dollar demand in the FX market. Many businesses require dollars to import raw materials, machinery, and other inputs. The inability to access dollars at competitive rates forces some corporations to turn to the parallel market, exacerbating pressure on the naira. To address this issue, the CBN must ensure adequate dollar supply to the official market and implement policies that encourage local production and reduce import dependency.

CBN’s Interventions: A Double-Edged Sword
The CBN’s interventions in the FX market are essential for stabilizing the naira. However, these interventions are not without challenges. Frequent injections of dollars into the market can deplete foreign reserves, while inconsistent interventions can lead to market uncertainty. To strike a balance, the CBN must adopt a strategic approach that combines targeted interventions with long-term reforms aimed at boosting dollar inflows and reducing demand pressures.

Outlook for the Naira: Cautious Optimism
Despite the recent depreciation, analysts remain cautiously optimistic about the naira’s outlook. The CBN’s commitment to supplying dollars to the market, coupled with ongoing FX reforms, provides a foundation for stability. However, the naira’s performance will depend on several factors, including global oil prices, domestic policy implementation, and investor confidence. Addressing structural challenges such as inflation, debt, and low non-oil exports will be critical for sustaining the naira’s gains in the long term.

Conclusion: Navigating a Complex Landscape
The naira’s recent depreciation underscores the complexities of Nigeria’s FX market. While the CBN’s interventions and reforms have provided some stability, challenges such as mounting debt, declining reserves, and high inflation continue to pose risks. To achieve lasting stability, Nigeria must address these structural issues, attract sustainable dollar inflows, and implement policies that promote economic diversification. The road ahead is fraught with challenges, but with strategic planning and consistent policy implementation, the naira can regain its footing and contribute to Nigeria’s economic growth.