The naira was trading at N545 to the dollar on the parallel market at the weekend, maintaining its strongest level since early September 2021. The local currency exchanges at N411.59 to the dollar at the official market.
The naira stability was triggered by drop in dollar demand by importers and other forex users who are going for substitutes for importee products and raw materials.
The Nigeria’s foreign exchange reserves declined to $41.5 billion this week, a drop of around $100 million, according to the central bank’s 30-day moving average benchmark.
Trading Desk Manager, AZA, global forex dealer, Murega Mungai, said inflation also fell for a seventh consecutive month, with prices rising by 15.99 per cent in October compared to 16.63 per cent a month earlier, driven lower by falling food costs.
“With weaker dollar demand unlikely to change, we expect the Naira to remain around the N540 to dollar handle in the coming week (this week),” he said.
Responding to the naira position, the International Monetary Fund, welcomed steps taken toward unification of the exchange rate and stressed the need for further actions.
“The discontinuation of the official exchange rate is a step in the right direction but continued dependence on administrative measures to address forex shortages sustains uncertainties and increases the risks of a sudden and large adjustment in the exchange rate. Taking advantage of the favorable global conditions, improving current account and robust oil prices, the mission advised a move to a unified and market-clearing exchange rate without further delays,” the IMF said in its Atricle IV Evaluation report released at the weekend.
It said that to preserve competitiveness, any exchange rate adjustment should be accompanied by clear communications regarding exchange rate policy going forward, macroeconomic policies to contain inflation and structural policies to facilitate new investment.
“A further move toward a market-clearing exchange rate will also help build foreign exchange buffers through higher capital inflows. Despite the recent Special Drawing Rights allocation and a successful Eurobond issuance, gross reserves remain significantly below the IMF’s recommended adequacy levels,” it said.
The IMF said slow forex reforms and uncertainties regarding the ability to repatriate foreign funds have discouraged new capital inflows.
“With an external position that is assessed to be weaker than implied by Nigeria’s economic fundamentals and desired policies, a narrow export base, and limited capital inflows, the mission recommended preserving foreign exchange reserves through sustainable policies. The mission assessed Nigeria’s capacity to repay the outstanding credit from the 2020 Rapid Financing Instrument (RFI) to be adequate,” it said.
The Fund said Nigeria’s economy is recovering from a historic downturn. “Helped by government policy support, rebounding oil prices and international financial aid, Nigeria exited the recession in 2020 fourth quarter, earlier than expected. Output rose by 5.4 per cent (y-o-y) in the second quarter, mainly reflecting base effects from transport and trade sectors and continued strong growth in the IT sector,” it said.
However, manufacturing and oil sectors remain weak, reflecting continued foreign exchange shortages, and security and technical challenges.