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Naira Falls on Weak Inflation Report, CBN Policy Direction

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Naira Declines on Weaker than Expected Inflation Report

The Naira declined on Wednesday against the United States dollar after a report by the National Bureau of Statistics shows the inflation rate surged to 12.40 percent in Africa’s most populous nation, Nigeria.

Nigerian Naira slid from N452 it exchanged to a US dollar earlier on Wednesday to N453 on the black market after the report was made public later in the day.

The local currency appreciated against the British pound by N3 to N550, better than the N553 it traded earlier on Wednesday.

Against the Euro single currency, the Nigerian Naira remained flat at N490, the same rate it was exchanged earlier on Wednesday.

On the nation’s Investors and Exporters’ Forex Window, the Naira was exchanged at N386 to a US dollar on Wednesday, the same rate it was traded on Tuesday but opened at N368.63 against the greenback on Thursday. A 0.6 percent decline from Wednesday close.

However, the local currency slid as low as N400 against the US dollar on the I&E FX window before pulling back to close at N386 on Wednesday. That was largely due to the inflation report released during the day.

A turnover of $16.06 million was registered on Wednesday, up from $15.31 million recorded on Tuesday, according to the FMDQ Group data released on Thursday morning.

The local currency declined after data shows the nation’s consumer prices are not slowing down any time soon and further highlighted the possibility of a decline in consumer spending and economic activities in the second half of the year.

This, coupled with the report that the Central Bank of Nigeria is planning to converge the nation’s exchange rate to one single rate across forex segments, created panic and likely triggers hoarding across forex markets.

Is the CEO/Founder of Investors King Limited. A proven foreign exchange research analyst and a published author on Yahoo Finance, Businessinsider, Nasdaq, Entrepreneur.com, Investorplace, and many more. He has over two decades of experience in global financial markets.

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Nigeria’s FX Inflows Leap 57% as CBN Steers Economic Confidence

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Nigeria’s foreign exchange (FX) inflows have surged by 57% over the past year, signaling newfound stability for the Naira.

Analysts attribute this growth to the Central Bank of Nigeria’s (CBN) consistent policies, which have bolstered investor confidence and enhanced market stability in Africa’s most populous nation.

Data from the CBN reveals that FX inflows rose to $8.86 billion in February 2024, compared to $5.66 billion in February 2023.

This increase is a testament to the effectiveness of the CBN’s strategic measures. Similarly, foreign exchange turnover skyrocketed 180% year-on-year to $240.64 million in February 2024.

“The upsurge in FX inflows reflects the positive impacts of increased interest rates and the relative stability of the exchange rate,” said Ayokunle Olubunmi, head of financial institutions ratings at Agusto Consulting.

He noted that high interest rates in Nigeria are attracting investors seeking better returns compared to developed countries.

The CBN has actively engaged with foreign investors, addressing concerns and providing insights into monetary policy actions.

Olayemi Cardoso, the CBN governor, emphasized that investor confidence has been restored, partly due to the bank’s clearance of a $7 billion foreign exchange backlog.

New investments into Nigeria also increased significantly, reaching $1.24 billion in February 2024, compared to $0.33 billion in January 2024. This uptick is indicative of a more stable and attractive investment climate.

Analysts point out that improved oil production and higher global oil prices have significantly boosted FX earnings.

Also, government policies aimed at attracting foreign investment, along with strategic management of the exchange rate, have played pivotal roles in this economic revival.

The CBN’s efforts to diversify the economy and boost non-oil exports are starting to yield results.

Increased diaspora remittances, facilitated by better official channels and incentives, have further contributed to the rise in FX inflows.

While challenges remain, the positive trend in FX inflows suggests a more robust and stable economy, encouraging further investment.

Consistent and transparent economic policies are expected to enhance investor trust, stabilizing the Naira and fostering a more favorable exchange rate environment.

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Naira

Naira Hits Five-Month Low Amid Dollar Demand Surge

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Nigeria’s naira extended its losing streak to a fifth consecutive day as it slipped to its weakest level since March despite the Central Bank of Nigeria’s (CBN) interventions.

The naira closed at 1,577.29 per dollar on Monday, down from Friday’s N1,563.8 per dollar on FMDQ.

This decline comes despite the CBN’s efforts to stabilize the currency by injecting $122.7 million through dollar sales into the market.

However, analysts argue that these amounts were insufficient to balance the robust domestic demand for the greenback.

“The CBN has been in the market selling $50 million from time to time, which is not enough,” commented Carlo Morelli, senior portfolio manager at Azimut Investment SA.

Morelli attributes the persistent pressure on the naira to capital outflows and a lack of investor confidence in the currency, despite the central bank’s commendable efforts in tightening monetary policy and reducing naira liquidity.

Central Bank Governor Olayemi Cardoso has aggressively raised interest rates in an attempt to curb inflation and stabilize the naira.

The benchmark borrowing rate now stands at 26.25%, following an increase of 14.75 percentage points since May 2022.

However, the currency has weakened by approximately 70% against the dollar since exchange-rate controls were eased last year.

“Restoring foreign exchange broad confidence is the last step, and the huge volatility in May delayed the return to normalcy,” Morelli added.

“Many foreign investors are still waiting for more evidence of stability before considering Nigeria investable.”

The naira’s decline makes it the second-worst performing currency tracked by Bloomberg in 2024, trailing only the Lebanese pound.

The recent depreciation has been fueled by both seasonal dollar demand and ongoing investor skepticism.

The central bank’s next policy decision, set for July 23, is expected to address these issues. Monday’s data showing annual inflation quickened to 34.2% in June suggests that another rate hike might be on the horizon.

In a bid to bolster the naira, the central bank has increased Nigeria’s foreign exchange reserves to $35 billion as of July 8, the highest level since May 30, 2023.

This boost is attributed to recent loans from the World Bank and the African Export-Import Bank.

Omobola Adu, an analyst at BancTrust & Co. Investment Bank, noted that recent pressure on the naira has also stemmed from corporates and individuals preparing for foreign vacations.

“Boosting the supply of FX into the country remains crucial for the government to alleviate pressure on the naira,” Adu stated.

He suggested that a eurobond or local dollar bond sale later this year, along with increased support from multilateral institutions, could help shore up reserves.

Despite these challenges, Central Bank Governor Cardoso remains optimistic, asserting that the worst of the currency’s volatility is over.

He reiterated this sentiment on Thursday in Lagos, addressing business leaders and highlighting improvements in crude output and capital inflows as positive signs.

Nigeria, Africa’s largest crude producer, relies heavily on oil sales, which account for at least 80% of its export earnings.

The country’s combined crude oil and condensate output rose to 1.5 million barrels per day in June, the highest since February, according to the upstream petroleum regulatory commission.

“While the naira may be undervalued, for the naira to stabilize and perhaps regain ground, large portfolio and capital inflows are needed,” said Samir Gadio, head of Africa strategy at Standard Chartered Plc in London.

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Zimbabwe Urged to End Dollar Dependence, Boost Local Currency

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Zimbabwe must take decisive steps to reduce its reliance on the US dollar and promote the use of its own currency, according to Information Secretary Nick Mangwana.

In an opinion piece published in the Herald newspaper, Mangwana outlined the urgent need for de-dollarization to achieve economic sovereignty, stability, and growth.

“The benefits of de-dollarization far outweigh the costs, making it an urgent imperative for Zimbabwe to break free from the US dollar grip,” Mangwana asserted.

His call comes as more than 80% of the nation’s transactions are currently denominated in dollars, a situation exacerbated by the lifting of a ban on the US currency at the start of the coronavirus pandemic in March 2020.

This move was initially intended to ease an acute shortage of foreign exchange.

Mangwana said reducing reliance on the greenback is a critical step toward regaining economic control.

“De-dollarization will help promote our local currency and diversify the country’s reserves,” he said.

By encouraging the use of the Zimbabwean dollar, the country can work towards stabilizing its economy and fostering sustainable growth.

The push for de-dollarization is part of a broader economic strategy. Last week, President Emmerson Mnangagwa hinted that Zimbabwe’s bullion-backed Zimbabwean dollar (ZiG), its sixth attempt in 15 years to establish a stable currency, may become the sole legal tender before 2030.

This move is seen as a long-term solution to the ongoing currency instability.

Mangwana’s advocacy for de-dollarization reflects a growing consensus among government officials that economic independence is vital for Zimbabwe’s future.

“Reducing our dependence on the US dollar will not be without challenges, but the long-term benefits are undeniable,” he said.

The transition to a more self-reliant economic model is expected to involve significant policy changes and strategic planning to ensure a smooth and effective implementation.

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