Market News

By : Geoff Iyatse

• Naira mired in stability trap, behind broader rally against dollar 

• Naira struggles to regain February N1500/$ band 

• Ghanaian Cedi gains 33 per cent in three months 

• Banks reactivate cross-border transactions on naira cards

The consequences of poor infrastructure on building a competitive industrial sector weigh heavily on the prospect of leveraging a tumbling dollar and the broader United States economy to strengthen the value of the naira.

Anxiety over the independence of the U.S. Federal Reserve in the face of an overbearing and extremely unpredictable Presidency has sent the dollar tumbling since Donald Trump returned to office.

Over the past six months, the U.S. Dollar Index (DXY), a measure of the currency’s relative strength, has declined by 11 points. The index has fallen to its lowest point since February 2022.

The naira has a rare chance in the breakdown of the three-year dollar upswing to cut the 70 per cent loss to hastily implemented pro-market foreign exchange (FX) market reforms in the past two years.

Sadly, the lack of major catalysts may lead to a continued lacklustre performance. The currency lags behind changing market trends with some Africans gaining over 30 per cent against the greenback.

Ghanaian Cedi, for one, has gained over 33 per cent since the start of the dollar wither in April, rising from 15.45 Cedi/$ to close at 10.35 Cedi/$ last week. From November, when Cedi fell since the famous 2007 currency redenomination, the Ghanaian currency has traded 37 per cent upside the dollar.

Under Trump’s second coming, the West African CFA Franc (which is currently trading at 2.9:1 against the naira underpinning how much Nigerian currency has fallen in recent years), has gained over 11 per cent against global benchmark currency.

However, the naira, with the advantage of FX reform and low base effect, is largely indifferent to the negative market position of the dollar. Last week, the naira closed at N1,529/$ as against N1,544/$ at which it opened the year, translating to an insignificant change – one per cent.

But for the Central Bank of Nigeria’s (CBN) ‘medication’, the naira would be trading in the negative year-to-date. In April and May, it broke, again, the N1600/$ psychological ceiling, causing apprehension across different segments of the market.

At some point in May, the naira traded for N1,614/$1. Trading continued beneath N1,550/$ until cosmetic approaches, including subtle and overt liquidity supports, reined in panic trading.

As liquidity drained out in early April, the CBN injected $197.71 million into the retail segment to increase supply. In May, the CBN pumped as much as $580 million to stabilise the naira.

There were other interventions at different points to stabilise and keep the naira around the first quarter exchange value. CEO of Financial Derivatives Company, Bismarck Rewane, puts the total value of intervention at $8 billion, a figure the apex bank disputed.

Whereas Rewane’s position on the cost of intervention remains debatable, the waning external reserve speaks expressly about the country’s poor FX earnings, which heightens the vulnerability of the naira.

Despite the aggressive export campaign of the current administration, the gross external reserve has lost $3.7 billion since January or nine per cent of last year’s closing balance.

A falling external reserve suggests that the country is not earning as much as it was earning or spending more. At $37.2 billion, Nigeria’s external reserve is 46 per cent short of its all-time high (estimated at $64.85 billion on August 8, 2008).

A declining FX reserve is a sad trajectory of Nigeria’s economic transition. Since 2008, the sizes of both population and import have grown tremendously, which calls for an expanded reserve. Population, on its part, has grown by over 38 per cent – from less than 160 million to nearly 220 million (by estimation).

On a per capita basis, external reserves as a measure of a country’s external sector’s strength, is more perilous. On August 8, the external reserve per capita was $438.5 or 2.5x today’s value ($171.4).

A $37 billion external reserve places Nigeria behind Egypt, South Africa, Algeria and Libya even in absolute figure analysis. That Nigeria is much bigger than the African countries and relies more on foreign-produced goods increases the risks of a low external reserve, which serves as a buffer for external financial dealings.

But in the face of waning reserves, the Central Bank said the country’s net external exchange reserve (NFER), which hit $23.11 billion last year, a sharp rise from $3.99 billion in 2023, means Nigeria is in a comfort zone.

The disclosure, though commended, six months, in fiscal and external position analysis, is a long time, suggesting that the NFER in public knowledge has a lag challenge.

Whereas the naira falters, its regional and aspirational pairs are trending upward. Since April when the dollar hemorrhage began, the South African Rand has gained 10 per cent in exchange value.

Algerian Dinar has edged up slightly as well – by nearly two per cent. The value of the dirham of Morocco, which comes next to Nigeria as the fifth biggest economy in the continent, has also gained over three per cent. The Egyptian Pound, which was equally floated after a prolonged crisis, has been relatively stable.

A few of the bullish African currencies had firmed up against the dollar even before the recent rally, unlike the naira, which had lost nearly 75 per cent to reform until the recent stability.

Still, the naira seems to be mired in a stability trap. Whereas the domestic currency has appreciated by four per cent since early April, it is yet to regain its February N1500/$ trading band.

Also, many of the comparative currencies such as Cedi, unlike the naira, Prof. Godwin Owoh, an economist, argued rely on the positive internal fundamentals of their economies to pull off their run against the dollar.

“The Ghanaian Cedi has significantly appreciated from 2024 to date. The best the naira achieved is artificial stability – stability that is never market-determined but mechanically derived from price pumping. It is a stability that is funded by the reserves, with a considerable backlog of FX forward contracts that are largely not honoured. The trend line shows this clearly. Lull in the naira depreciation is explained by an equivalent probabilistic drop in the balances of the reserves,” Owoh noted.

Like others, he argued that the naira outlook was vague as a result of corruption. Hence, it is not responsive to market fundamentals as its fate is tied to cleaning the Augean stable.

A lacklustre naira has a pull-and-push relationship with infrastructure stock, which has huge consequences for commodity processing, value addition and export support logistics.

With Nigeria’s export basket containing majorly extremely volatile commodities, Nigeria ranks very low on economic complexity, a metric showing the diversity and sophistication of a country’s productive knowledge and capacity. A report ranks Nigeria 129th out of 132 countries surveyed.

Indeed, the knowledge index report is far from abstract econometrics analysis. In the first quarter of the year, crude accounted for 63 per cent of the country’s total exports. Besides, much of the non-oil FX repatriations come from gingers, cocoa beans, cashews and other commodities exported in raw forms.

Nigeria loses to the underdeveloped industrial sector through two channels – low injection of FX earnings and high leakage via huge demand for foreign goods.

Whereas raw material export is the saving grace, it also faces poor infrastructure setbacks. Reports said an export cargo spends 18 to 20 days at Papa Port, which is much longer than the three to five days global benchmark.

To reverse this, experts have suggested, the country would need to recalibrate its industrial sector to improve its competitiveness. Studies put the infrastructure gap, a major barrier to an effective industrial sector, at $3 trillion in yearly spending.

The huge infrastructure gap, the Manufacturers Association of Nigeria (MAN), has huge implications for the competitiveness of local production. Low infrastructure means a higher cost of production from different fronts – the high cost of funds, higher haulage expenses and low labour productivity.

At a 35 to 40 per cent commercial interest rate, Nigeria is among the countries with the highest cost of borrowing. Whereas a single-digit interest rate is in focus, the Chief Executive Officer of Sterling Bank Plc, Abubakar Suleiman, said the lofty goal would remain a mere aspiration until the country deals with the inherent challenges that fuel inflation and high cost of operation, which include self-sourced power.

The near-term prospect of a stronger naira is getting brighter. Last week, many deposit money banks (DMBs) reactivated cross-border spending on the naira cards with generous caps.

For First Bank of Nigeria, customers could spend as much as $500 monthly on its naira MasterCard for international transactions. For GTBank, customers could withdraw up to $500 across overseas ATMs and transact $1000 across online and PoS channels in three months.

“As part of our unwavering dedication to enhancing your banking experience, we are delighted to inform you that all UBA Premium Naira Cards, including Gold, Platinum, and World variant cards, are now fully operational for international transactions,” UBA emailed its depositors.

The flurry of activations of cross-border dollar transactions, which were suspended at the height of the liquidity crunch, means less pressure on the black market. It also signifies broader rising liquidity at the retail end of the market.

Yet, the naira, generally considered undervalued, needs concrete fiscal catalysts, rather than token incentives by banks, for a firmer and sustainable appreciation that could push through the currency to the bullish N1300/$ mark projected by some analysts earlier in the year.