LAGOS,Nigeria (VOICE OF NAIJA)-The foreign exchange (FX) market in Nigeria witnessed a significant resurgence, experiencing its highest single-day turnover since 2017, totaling $1.085 billion, as reported by FMDQ Securities Exchange.Â
This surge, up by 27 per cent from the pre-Easter break trading session, signals a remarkable shift amidst a prolonged dollar scarcity that has hindered economic activities.
“Liquidity is definitely returning to the market and that’s solely down to the CBN’s reforms,” said The director, research and strategy at Lagos-based investment bank Chapel Hill Denham. Tajudeen Ibrahim,Â
“The last time we had the kind of average daily FX trades that we recorded in the first quarter of this year was before COVID in 2019.”
“The CBN must now stay the course of the reforms,” he added.
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Increased availability of funds in the market helped the naira to keep gaining value for a whole week, hitting its highest level in three months at N1,278 per US dollar, up from N1,309 last Thursday.
Since the Central Bank of Nigeria (CBN) enticed foreign portfolio investors with higher interest rates on government debt and a lower-valued naira, dollar inflows into Nigeria have significantly increased.
Additionally, clearing a long-standing backlog of foreign exchange forwards has restored confidence in the effectiveness of these measures.
“The payments of FX backlogs and improving carry trade opportunities are piquing investors’ interest,” said lead economist at CardinalStone, an investment bank, Olaolu Boboye.
Nigeria is becoming a notable destination for carry traders, who borrow money from places with low interest rates and invest it where rates are higher.
Much of the recent increase in dollar inflows to Nigeria can be attributed to these traders.
Nigeria’s carry trade presents an interest rate differential of 21.8 percent, ranking it behind only Egypt (25.2 percent) and Ghana (24.2 percent) among similar African nations such as South Africa, Zambia, Kenya, Mauritius, Uganda, and Angola.
However, when considering the expected currency movement using 12-month Non-Deliverable Forwards, Nigeria boasts the highest return for carry trade among these nations, standing at 16.1 percent.
Egypt follows closely with 11.9 percent, and Ghana, rounding up the top three, offers 10.7 percent.
During the Treasury Bills auction on March 27, bids for the one-year paper surged to a historic high of N2.48 trillion, which was 17 times higher than the government’s intended raise of N142 billion. Foreign investors are suspected to have been the driving force behind this surge, as they were during a similar auction on March 13.
According to the CBN, foreign investors accounted for over 75 percent of the bids received during the auction.
Dollar inflows are enhancing liquidity and providing crucial relief to businesses across various sectors, from manufacturers to retailers.
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The monthly turnover in the foreign exchange (FX) market, which serves as a gauge of liquidity, has surged to an average of $4.3 billion year-to-date, compared to $2.3 billion in 2023.
This increase reflects growing interest from foreign investors in a market that was previously overlooked.
The Central Bank of Nigeria (CBN) estimated cumulative foreign inflows since the start of the year at $2.1 billion, surpassing the total of $1.6 billion recorded in the entirety of 2023.
This increase has contributed to the accumulation of foreign exchange reserves, with the CBN projecting reserves to reach $35 billion by the end of this month.
Previously, investors avoided Nigeria’s local debt due to the central bank’s reluctance to devalue the heavily managed naira.
This stance led to the currency being perceived as overvalued by foreign traders, exacerbating shortages of hard currency and contributing to soaring inflation.
Analysts suggest that the CBN’s reintroduction of dollar sales to Bureau de Change (BDC) operators has sent a clear signal of heightened dollar inflows into the apex bank’s reserves.
This move has instilled confidence among foreign investors, who may have doubted the CBN’s capacity to manage its dollar reserves effectively.
The rise in diaspora remittances has also played a role in the increase of dollar inflows into Nigeria.
The narrowing gap between the official and unofficial exchange rates has reduced the incentive for Nigerians abroad to use informal channels for money transfers, thus boosting liquidity in the official market.
BusinessDay