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Nigeria’s currency, the naira, has shown stability over the past month, trading between N1,476 and N1,485 against the dollar in the official foreign exchange market, but sustainability remains a concern.

On Friday, the naira ended the trading week at N1,485.53 per dollar, unchanged from Thursday’s closing of N1,485.36. Earlier in the week, the dollar rates were as follows: N1,476.12 on June 3, N1,476.95 on June 4, N1,488.60 on June 5, N1,481.49 on June 6, and N1,483.99 on June 7, data from the FMDQ Securities Exchange Limited showed.

“There is usually a level for a currency that is too cheap, which means it cannot get markedly weaker for any length of time (unless inflation is out of control). This is true for the naira today. It is so cheap the current account is probably in surplus every month. That then provides the support to stabilise the currency,” said, Charlie Robertson, head of Macro Strategy FIM Partners UK Ltd.

The naira stability has been attributed to low demand and increased dollar inflows, which have helped to strengthen the external reserves.

Within a month, about $5.95 billion from the World Bank and Afreximbank entered into the Nigerian economy, helping to strengthen Nigeria’s external reserves and the value of the naira.

Nigeria’s external reserves have increased by 2.81 percent month-on-month to $33.640 billion as of June 20, 2024 compared to $32.720 billion recorded in May 20, 2024, according to data from the Central Bank of Nigeria (CBN).

“I reckon that what is happening at the FX market is a reduction in demand largely because the market expects the naira to appreciate in the short term before they begin to make their demands. So demand is slowing down and it’s reflecting on the price of the country,” Tajudeen Ibrahim, director research and strategy ChapelHill Denham, said.

Ayo Teriba, CEO of Economic Associates, stated, “We’ve seen stability before in April, after the second tightening with the naira being the best performing currency in the world and quickly becoming the worst performing currency.” He emphasised, “We are looking for stability for more than a month a tightening.” Teriba noted, “It remains to be seen if the stability will be sustained and one can link the stability to the reserves because it has also been stable.” He concluded, “We have to dwell more on building reserves beyond the level where the market will be volatile. The level of reserves we are currently holding for an economy of our size is not adequate.”

Aminu Gwadabe, president of the Association of Bureau De Change Operations of Nigeria (ABCON), said, “Our output as a nation has drastically reduced, the exit of multinational companies suggest a lack of confidence in the economy. Inflation, interest rates are all heading southwards.” He advised, “We need to put all hands together through collaboration, cooperation and coordination.” Gwadabe noted, “The recent stability is a welcome development but temporal as all the indices are not in our favour. Foreign investors are already catching their new climes and leaving the frontier markets. We need to be transparent and honest, create friendly and stakeholder engagement.” “However, this stability is expected to be temporary,” he said.

Olayemi Cardoso, governor of the CBN, on Friday said that despite current drawbacks, the Bank had consistently improved FX supply while protecting the interests of all parties. In addition, he stressed the importance of restoring confidence and trust in the Nigerian economy for all investors, local and foreign.

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The CBN under Cardoso has increased the Monetary Policy Rate (MPR), also known as benchmarks interest Rates by 750 basis points to 26.25 percent in May 2024 from 18.5 percent in July 2023, to rein in rising inflationary pressure.

Lamido Abubakar Yuguda, member of the Monetary Policy Committee (MPC), said, fighting inflation remains the key to achieving other macroeconomic objectives.

“Inflation remains a major challenge for the economy as it is still way above the threshold, and our instruments must be deployed to counter the trend, to promote growth in the economy,” he said.

The strengthening of the US dollar in the face of widening inflation differential between Nigeria and AEs (especially, the US) has implications for both the naira exchange rate and the prospects for Foreign Portfolio Investment inflows to Nigeria.