The Nigerian naira is poised for a period of relative stability in the coming months as pressure from forward central bank foreign exchange (FX) contracts diminishes, according to a recent report by Rand Merchant Bank (RMB) in Lagos.
The easing pressure is expected to provide a much-needed respite for the embattled currency, which has faced significant devaluation over the past year.
Last week, the market absorbed the equivalent of $1.3 billion in forward FX contracts, a move that is anticipated to reduce the outstanding forward contracts to just $198 million between now and December.
This reduction is a positive signal for the naira, which had depreciated 9.9% last week to close at 1,486 per dollar, before recovering slightly to 1,476.1 on Monday.
“We expect the pressure on the naira to ease going into the second half of the year,” said Ademola Olayiwola, an analyst at RMB.
“We expect some stability in the foreign exchange market as the backlog of FX demand is gradually cleared and the central bank continues its interventions. The reduction in forward contracts signals a decrease in speculative attacks on the naira, which has been a significant factor in its volatility.”
Also, the Central Bank of Nigeria (CBN) has implemented several measures to stabilize the currency, including tightening monetary policy and increasing foreign reserves.
These actions, coupled with the anticipated reduction in forward contracts, are expected to help balance supply and demand dynamics in the FX market.
Olayiwola also noted that while the naira may experience short-term fluctuations, the overall outlook for the second half of the year remains cautiously optimistic.
“The key to sustaining this stability will be the government’s ability to manage external pressures and maintain investor confidence,” he added.
The Nigerian economy, heavily reliant on oil exports, has faced numerous challenges, including fluctuating oil prices and global economic uncertainties.
However, recent upticks in oil prices and efforts to diversify the economy are seen as positive developments that could support the naira’s stability.
Market participants will be closely monitoring the central bank’s policies and external economic factors in the coming months.
As the forward contract obligations diminish, there is a hopeful sentiment that the naira could find a more stable footing, reducing the need for aggressive central bank interventions and allowing for a more balanced economic environment.
In summary, the outlook for the Nigerian naira is cautiously optimistic as forward FX pressures ease, providing a potential pathway to stability.
The central bank’s continued efforts and favorable economic conditions will be crucial in determining the currency’s trajectory in the near future.