Foreign exchange inflows into the Nigerian Autonomous Foreign Exchange Market (NAFEM) surged by 66.7 per cent last week to $2.2 billion after banks complied with the new directives of the Central Banks of Nigeria.

The bountiful supply was however not buoyant enough as the value of the naira dipped by 2.3 per cent.

The CBN had issued a series of circulars and guidelines with new macroprudential limits for net open positions as well as removing restrictions on International Money Transfer Operators (IMTOs) exchange rate quotes as part of efforts to boost liquidity and curb the volatility in the foreign exchange market.

By the end of last week, inflow of dollars at the NAFEM window, which is also known as the Investors and Exporters (I&E) window surged to $2.2 billion..

The value of the naira at the I&E window had depreciated by 2.3 per cent to close the week selling at N1,469.97 to the dollar with trades consummated between N830 and N1,550 to the dollar at the official window.

At the parallel market, the value of the naira had similarly lost value at N1,470 to the dollar, an 8.2 per cent decline in the value of the local currency. According to analysts at Cordros Research, the boom in forex supply at the I&E window was due to banks complying with the new macroprudential limit for net open positions amid the CBN removing restrictions on IMTOs exchange rate quotes, as well as interbank forex deal spreads and interbank sale of proceeds.

The analysts at Cordros say they expect the pressure on the local currency to persist, as the CBN’s updated policy on limiting banks’ foreign currency exposure will continue to support turnover in the NAFEM and improve supply to the market over the short-term.

“Also, with significant gains made with regards to addressing the forex backlog, the potential for a more stable forex market seems possible. However, we do not expect to see meaningful appreciation of the currency until the apex authority ensures the backlog is completely cleared, policy actions are further aligned to be frictionless, the frictionless policy actions are sustained, and it builds capacity to intervene within the market to limit volatility during periods of pressure,” they stated.

Analysts at Afrinvest West Africa, in an emailed note stated that the “CBN governor might be looking at the wrong side of the spectrum in emphasising dollar demand for services and imports as the root causes of the declining Naira, given that demand for services and imports would always exist if not readily available in the country.

“Moreso, a chunk of these travellers eventually morph into diaspora workers who remit forex back into the country as remittance remains the most resilient source of forex inflows to date. Therefore, blaming the current forex crisis on demand-pull factors might be a distraction in tackling the issues affecting supply.

“We opine that the CBN should instead focus on reforms that would restore confidence in the market and boost major forex inflow channels. In light of this, we applaud the CBN’s continued work to clear verifiable forex backlogs as it is a much needed step in the right direction to restore confidence in the market.

“Also, the narrowing of the negative real rate of return as evidenced by the upward repricing of yields at the recent NT-Bills auction is commendable. However, we reiterate that closer coordination with the fiscal leg is needed to curb excess liquidity given that money supply grew 510 per cent to N78.7 trillion at the end of 2023.”

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