Nigeria’s foreign exchange reserves dipped to a six-year low of $32.87 billion at the end of December, data showed last week, as the central bank sold dollars to try to prop up the ailing naira currency.
A backlog of unsettled forwards, undelivered promises of dollar inflows and a two-decade peak in inflation have translated into a tumultuous year for the naira, which has lost over 50% of its value to become the third worst-performing global currency in 2023, said Kyle Chapman, FX markets analyst at London-based Ballinger & Co.
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This prompted the Central Bank of Nigeria (CBN) to run down its foreign exchange reserves, which peaked at $47.63 billion in June 2018, to defend the naira. The dollar reserve of Africa’s biggest economy in December dwindled to a level last seen in September 2017, when it stood at $32.16 billion.
“The naira’s downwards momentum is likely to continue through much of 2024, and its ultimate trajectory will depend on whether the CBN’s rhetoric transforms into concrete policy moves that drive up the flow of U.S dollars into Nigeria and shore up trust in the official market,” Chapman said.
The naira last week touched a low of 1,248 naira on official market and sold for 845 naira on Friday.
It was quoted at 1,210 naira on the parallel market while on the forwards market the naira sold for 1,037.50 to dollar for one-month settlement .
CBN Governor Olayemi Cardoso has said he would allow market forces to determine exchange rates while setting clear, transparent and harmonised rules governing market operations.
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“If the CBN’s promised measures materialise and (President Bola) Tinubu’s government enacts structural changes to increase oil production or to drive foreign investment, there is plenty of opportunity for the naira to lift from its record lows,” Chapman said.
“But a quick fix is unlikely, and further depreciation will come to counteract supply and demand imbalances.”
