Having plunged from N907 per dollar on the official market at the end of last year to about N1,500/$1 at the end of February, and also from N1,250 per dollar to N1,900/$1 on the parallel market, the naira, looked to be headed for an all time low of N2000 per dollar a few weeks ago.
However, in early March, global investment bank, Goldman Sachs, released a report in which it forecast that the local currency would appreciate to N1,200 per dollar within the next 12 months. The US-based lender said at the time that it believed the naira was undervalued, adding that increased monetary policy tightening and the Central Bank of Nigeria’s (CBN) shift to a more orthodox policy setup, led it to conclude that “Nigeria is turning the corner following its recent currency crisis.
” The lender said: “We think the naira looks cheap on a REER basis in a historical context. Added to this, the current account surplus was +3.5 per cent of GDP in 2023 Q3, and we expect it to increase above +5.0 per cent on the recent FX moves and associated import compression. We thus see the reason for the naira to be undervalued, and we see it appreciating to N1,200 within the next 12 months.”
Goldman Sachs’ stance was supported by the Chief Economist for Africa and the Middle East at Standard Chartered, Razia Khan, who said she saw the naira ending 2024 in a 1,200-1,300 per dollar range as a result of steps taken by the CBN to attract foreign portfolio investors.
As she put it, “in more benign conditions, we could test even N1,100 a dollar or lower. Some of the forex backlogs have been cleared, monetary policy has been tightened and the transmission mechanism of policy is more effective.”
Goldman Sachs’ latest forecast
Interestingly, while financial experts were still reacting to the aforementioned predictions, Bloomberg reported Goldman Sachs’ economists as saying that the naira had already established itself as the top-performing currency globally in April and that, amid the CBN’s ongoing efforts to ensure exchange rate stability, they expected the local currency to extend its gains and surpass their earlier forecast of N1,200/$1 in 2024.
One of the Goldman Sachs economists, Andrew Matheny, was quoted by Bloomberg to have said that: “This probably can run further; we would see an extension of the move to N1,000 and maybe even sub-N1,000.” He noted that since Goldman’s earlier forecast, “six weeks have gone by and they (CBN) are continuing to hold the line, so that’s encouraging.”
Goldman Sachs’ optimistic forecast was clearly the result of the sustained rally of the naira observed across both the parallel and official segments of the foreign exchange market at the time. For instance, Bloomberg data showed that in the first 12 days of April, the naira surged 12 per cent against the dollar, adding to a one per cent increase in March.
Cardoso’s IMF interview Indeed, the naira’s remarkable rebound was one of the topics that was discussed in the interview that CBN Governor, Mr Olayemi Cardoso, had with the International Monetary Fund’s (IMF) African Department Director, Abebe Selassie, at the IMF/World Bank Spring Meetings in Washington DC, held between April 11 and 20, 2024.
Responding to a question on how the CBN’s reforms led to the naira’s strengthening, Cardoso said: “When I started, we had a situation where within a month or two, we were regarded as the worst-performing currency of any country. Six months later, we are judged to have the best-performing currency of any country. “So, I think those things speak for themselves. A situation where in the recent past, the greatest amount of liquidity on a daily basis was in the region of $200 million to $300 million.
In six months, we have traded over $1 billion. FX liquidity has taken a centre stage in the activity of the monetary side, and I think people see that; they also see the exchange rate coming down and they understand that there is a lag. Ultimately, the objective is that we can moderate inflation.”
He also attributed the naira’s steady recovery against the dollar at both the official and parallel markets to CBN’s policy measures, such as monetary policy tightening, settlement of all outstanding FX obligations, as well as its resumption of dollar sales to eligible Bureaux De Change (BDCs).
Naira weakness
However, the CBN Governor was probably getting set for his trip back to Nigeria last week, at the end of the IMF/World Bank meeting, when the naira suddenly began to weaken on the foreign exchange markets. Specifically, last Friday, FMDQ data showed that the naira weakened further on the official market, closing at N1,339.23/$1 compared to N1309.88 per dollar on the previous day.
This meant that the local currency had declined against the greenback for six consecutive days on the official market, its longest weakening trend since its devaluation in January. Analysts attribute the naira’s fresh weakness on the official market to low domestic dollar liquidity.
Thus, in a report last Wednesday, Bloomberg said that supply of dollars was proving to be insufficient to support the CBN’s resolve to boost confidence in the naira, adding that volumes in the foreign-exchange market dropped to a two-month low of $86 million penultimate Friday before recovering to $133 million last Tuesday.
The news agency quoted head of Africa strategy at Standard Chartered Bank, Samir Gadio, as having said that: “The naira has been supported by onshore dollar selling as long positions were unwound, but the rally was probably overextended.”
According to Gadio, a dislocation started to emerge as domestic market participants sold dollars at increasingly lower spot levels which was not sustainable and led to a correction. Although the naira strengthened on the parallel market last Friday, recovering from a six-day losing streak to trade at N1,400 per dollar compared to N1,450/$1 on the previous day, analysts pointed out that the local currency had weakened at the segment of the forex market despite the CBN offering dollars to operators of Bureau de Change at N1,021 per dollar, 21 per cent below the official rate, last Tuesday, in a bid to improve liquidity on the parallel market.
Also, though there were reports in some quarters that the naira further appreciated to N1280/$1 on the parallel market on Saturday, the local currency’s slide against the greenback last week attracted the attention of the Senate Committee on Finance on Sunday.
Senate Committee on Finance
In a statement, the Chairman of the Committee, Senator Mohammed Sani Musa, said the committee was monitoring the situation and was committed to working with relevant stakeholders to implement effective policies and strategies to tackle the issue. He also disclosed that the committee “is exploring a range of policy options to mitigate the impact of naira depreciation and foster economic stability.”
The statement partly reads: “The Nigerian economy is facing significant challenges, exacerbated by both internal and external factors. Despite efforts to stabilize and bolster economic growth, the numerous initiatives and bold but necessary steps and policy decisions taken by President Bola Ahmed Tinubu, the persistent depreciation of the naira against major foreign currencies has become a pressing concern.
“The recent depreciation of the naira underscores the need for proactive measures to safeguard the stability and resilience of our currency. The Senate Committee on Finance is closely monitoring the situation and is committed to working collaboratively with relevant stakeholders to implement effective policies and strategies. “It is imperative that we address the root causes of Naira depreciation, including but not limited to fluctuations in global oil prices, fiscal deficits, and structural imbalances in the economy.
Furthermore, we must continue to enhance transparency and accountability in our fiscal management processes to instill confidence in investors and promote sustainable economic growth. “In light of these challenges, the Senate Committee on Finance is exploring a range of policy options to mitigate the impact of naira depreciation and foster economic stability. This includes robust oversight of fiscal policies, engagement with key stakeholders, and the formulation of targeted interventions to support key sectors of the economy.
“It is also the hope of the committee our economic managers will adhere strictly to the norms and standards set by this administration to ensure that we achieve the desired outcomes in taking Nigeria to its economic growth and prosperity.
As we pledge to give Mr. President and his executive arm of government every opportunity and support in legislation to achieve the set goals. “As we navigate these uncertain times, I urge all Nigerians to remain vigilant and resilient. Together, we can overcome the challenges facing our economy and chart a path towards prosperity for all.”
Conclusion
In fact, the consensus among financial experts is that while Cardoso said in his interview with the IMF that he would ideally prefer market forces to determine the exchange rate, the CBN governor’s view might not be shared by the fiscal authorities.
