Market News

BY Hope Moses-Ashike & Eniola Olatunji 

… Lower petrol, food importation could strengthen currency

The naira could see better days in 2025 as analysts project higher foreign exchange inflows into Nigeria as well as lower petrol and food importation next year.

Several experts who spoke with BusinessDay said there would be an increase in oil production, stronger net capital inflows into the economy and lower petrol/food importation in 2025, noting that these indices will work in the naira’s favour.

Uche Uwaleke, director of the Institute of Capital Market Studies at Nasarawa State University, forecasts a positive trajectory for the naira in 2025, attributing this outlook to lower petrol and food importation as well as increased fuel exports next year.

Uwaleke pointed to the reduced importation of petroleum products as a major driver of the naira rebound.

“With increased domestic refining capacity, we expect a significant decline in fuel imports, which will ease pressure on foreign exchange demand and strengthen the naira,” he explained.

He further highlighted the potential impact of increased earnings from the export of petroleum products.

“As Nigeria boosts its export capacity, foreign exchange inflows will improve, supporting the local currency,” Uwaleke noted.

Another factor, according to him, is the reduction in food imports, stemming from improved agricultural output.

Uwaleke also emphasised the role of foreign portfolio investments and diaspora remittances in supporting the naira, noting that, “Increased foreign investments and remittances from Nigerians abroad will inject much-needed liquidity into the economy.”

He stressed the importance of strong external reserves, noting that maintaining robust external reserves is vital for shielding the economy from external shocks and enhancing investor confidence.

The naira, on Friday, appreciated against the dollar, gaining N4 to close at N1,541/$ compared to N1,545/$ closed on Wednesday at the Nigerian Foreign Exchange Market (NFEM), data from the CBN indicated. The local currency steadied at N1,660 per dollar in the black market..

Zeal Akaraiwe, CEO at Graeme Blaque Advisory, in an interview with BusinessDay, said 2025 could be a turning point for the naira.

“Personally, I maintain an optimistic outlook on the naira’s trajectory and believe the year could mark a significant turning point, reversing many of the challenges that have weighed on the currency in recent years,” Akaraiwe said.

He said the optimism is underpinned by notable improvements in Nigeria’s macroeconomic environment.

The naira has lost about 70 percent of its value against the dollar. In October, it was declared the third worst performing currency in the world after the Lebanese Pound and the Ethiopian Birr. In fact, it was one of the worst currencies in the world for much of 2024.

But Olaolu Boboye, fixed-income and lead economist at CardinalStone Securities, said that the naira is now entering an era where there seems to be a lot of upside for it.

Factors contributing to the positive naira outlook

Last month, Nigeria’s oil production rebounded to its highest level since April 2021, reaching 1.69 million barrels per day (bpd), raising the prospects for increased petrodollar inflows.

Also, the commencement of the Electronic Foreign Exchange Matching System (EFEMS) has been another win for the naira as it has tackled speculation and improved transparency in Nigeria’s FX market.

However, the black market has since depreciated after an initial appreciation in the week the EFEMS began operations.

The appreciation at EFEMS shows that the interplay between demand and supply is in favour of a stronger naira.

“The existence and widespread acceptance of a black market for foreign exchange highlights two critical challenges: Either the legal framework is misaligned with the realities faced by citizens or there is a shortfall in the enforcement of existing laws,” Akaraiwe said.

In an effort to address the contradictory policies that previously pushed legitimate foreign exchange demand to the parallel market, the Central Bank of Nigeria (CBN) took a decisive step by relaxing the infamous ban on the 41 items from the official FX market.

Akaraiwe said that this policy shift ensures that all legitimate foreign exchange demand can now be met through official channels, providing businesses and individuals with access to the much-needed liquidity in the formal market.

Razia Khan, managing director and chief economist, Africa and Middle East Global Research, Standard Chartered Bank, said the parliament’s approval of $2.21 billion of external borrowing (Eurobond and sukuk issuance) could lift FX reserves, increasing confidence in FX stability.

Cardoso’s Pronouncement

Olayemi Cardoso, the CBN governor, has made several public pronouncements of his firm commitment to policy consistency, trust, transparency and liquidity support to the markets whenever necessary to inspire confidence.

“Trust is the currency of central banking. If the public loses trust in the institution, the efficacy of its policies diminishes. Our decision to implement the EFEMS is rooted in this understanding .By enhancing transparency and providing more accurate oversight of forex transactions, we send a strong signal that the CBN is serious about fair and efficient markets,” Cardoso said at the Harvard Club of Nigeria this year.

Why FX inflows are rising

The foreign exchange inflows recorded in the first quarter of 2024 into Nigeria were about 136 percent of the total inflows recorded in 2023.

In August, the CBN sold $876.26 million at an exchange rate of N1,495 per dollar at a Retail Dutch Auction System (rDAS) sale to support FX liquidity and promote price discovery.

Cardoso has maintained that there’s more supply of FX than demand.

However, despite several interventions to meet the demand in the FX market in 2024, there has been high volatility.

Akaraiwe said that one of the primary drivers of price distortions is information asymmetry—a situation where all market participants do not have equal access to credible and accurate data.

“This imbalance creates inefficiencies and can distort pricing mechanisms. A similar dynamic has been at play in the valuation of the naira.

“While supply has, in recent months, improved relative to demand, the lingering effects of past scarcity continue to shape market sentiment,” he said.

He said that the general perception remains one of scarcity because reliable and transparent information on the actual supply levels is not readily available to all stakeholders.

“This lack of visibility has led to a disconnect between reality and perception, sustaining an atmosphere of uncertainty,” he said.

The Road to Stability

Abdulrauf Bello, portfolio manager at Cowrywise, said that the distortion in exchange rates is likely as a result of massive loss of confidence in the FX market. He said the transmission that makes the increased supply to match demand is flawed.

“Point one will require increased CBN intervention. This is a classic case of market failure, and you need an intervention. The CBN leads the way and everyone follows. Once everyone is in, the CBN can then withdraw. Point 2 is what the EFEM is trying to take care of,” he said.

The True Value of Naira

Bello said, “My optimism on the FX rate is that it is only a matter of time for Point 1 to be solved. There are opportunity costs, but it will get solved eventually.”

Bello said that the naira might appreciate, though not to levels less than N1000.

“But getting it solved does not mean we would go back to N700 or N800. No, that’s not it. My sense is that even with all the problems associated with the economy, the FX rate should be within N1000 to N1200,” the Cowrywise portfolio manager said.