Nigeria’s currency, the Naira, continued its upward stride after the long Eid El Fitr holidays. It exchanged N1,125 to 1 USD Friday in the parallel market. According to Goldman Sachs – an international investment bank and financial services company, Naira is the world’s top-performing currency in April.
The Naira strengthened 12% against the dollar in April following a 14% rise in March.
Goldman economists initially forecasted the Naira will strengthen to N1,200 per dollar by end 2024, but they now see the possibility of Naira outperforming the prediction. If the Central Bank of Nigeria stays the course with its current reforms, that is.
The government of President Bola Tinubu introduced some reforms to reflate the Nigerian economy. It scrapped fuel subsidies that was a hole on government revenues. This has enabled government to keep its forex earnings rather than blow it on subsidies, thereby improving dollar supplies.
The efforts to unify the official and parallel exchange rates are a key reform agenda of the Tinubu’s government. The gap between the two rates have narrowed to only 3% in recent months.
Governor Olayemi Cardoso, assumed office in September. He has been aggressively hiking borrowing costs in order to attract foreign cash inflow. The government made sure to clear up the $7 billion backlog of dollar orders.
Although these reforms have led to economic hardships they also contribute to Naira’s resurgence by improving dollar liquidity in the system. Before now, scarcity of dollars in the banks piled pressure in the volatile parallel market, crashing the exchange rates.
Cautious Optimism
Notwithstanding, Goldman says it is maintaining a cautious optimism due to uncertainties whether the CBN will persist with the reforms.
“This probably can run further; we would see an extension of the move to N1,000 and maybe even sub-N1,000,” Goldman’s Andrew Matheny said in an interview. Since Goldman’s call in February, he said, “six weeks have gone by and they’re continuing to hold the line, so that’s encouraging”.
“There are questions about how socially sustainable this strategy will be,” he said. “We don’t have high conviction that they’re going to stay the course. It’s still early days of the central bank rebuilding its credibility.”
But Cardoso faces pushback from businesses. The Manufacturing Association of Nigeria (MAN) complained that rate hikes “reduces access to funds, manufacturing investments and competitiveness.”
The central bank may be compelled to raise interest rates even further to tame the high inflation rate.
The next meeting of CBN’s Monetary Policy Committee (MPC) meeting is on May 21.
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