Nigeria’s currency, the naira, has taken a sharp downturn, becoming the world’s worst-performing currency in the past month
This development has escalated the urgency for the Central Bank of Nigeria (CBN) to potentially raise interest rates further in response to the economic strain.
As of Friday, the naira has fallen to a record low of ₦1,466.31 against the dollar, its weakest since March 20.
This significant depreciation is primarily due to a severe shortage of US dollars in the local market, with the available supply plummeting to just $84 million on Thursday—only half of what it was the previous day.
This reversal comes shortly after CBN Governor, Yemi Cardoso lauded the naira as the best-performing currency worldwide as of April 2024, crediting a series of foreign exchange market reforms and positive feedback from international investors for the brief recovery.
However, the currency has faced severe volatility, with rates dropping as low as ₦1,600/$1 on the official market and ₦1,800/$1 on the parallel market in March.
These fluctuations have been challenging for the Nigerian economy, straining both consumers and businesses.
The Chief Economist for Africa and the Middle East at Standard Chartered, Razia Khan, speaking to Bloomberg, pointed out that the upcoming maturity of $1.3 billion in naira futures at the end of the month could further dampen market sentiment, potentially leading to increased volatility.
She said, “The belief is that this will create more demand for dollars.
“When the currency appreciated very fast, there had been a bout of profit-taking by offshore investors, and this meant that the dollar-naira exchange rate backed up again.
“This is completely in line with the functioning market.”
The report further highlights that the decline in the naira’s performance is expected to intensify pressure on the CBN to implement another rate hike after its upcoming policy meeting on May 21.
In February and March, the Central Bank increased rates by a total of 600 basis points. This move aided the naira in rebounding from its low of ₦1,627 naira on March 8 to ₦1,072 in mid-April, as investors sought out higher-yielding local assets.
Naira weakness was also seen on the unofficial market, where it slipped 0.9% to ₦1,468 naira a dollar on Friday owing to increased demand from individuals and small businesses, said Abubakar Muhammed, chief executive of Forward Marketing Bureau de Change Ltd., which tracks the data in the commercial capital, Lagos.
The weakness of the naira was also evident in the unofficial market, where it depreciated by 0.9% to 1,468 naira against the dollar on Friday.
According to the report, the chief executive of Forward Marketing Bureau de Change Ltd., Abubakar Muhammed, which monitors data in Lagos, attributed this decline to heightened demand from individuals and small businesses.
Two other African countries rank among the four worst-performing currencies in the last month.
The Zambian kwacha hit a record low of 27.3969 per dollar on Friday. Meanwhile, Ghana’s cedi weakened to 13.99 against the dollar on the same day, marking its lowest level since 2022.
Both countries are currently undergoing debt restructuring processes.
“For Ghana and Zambia, the delays with reaching a debt restructuring agreement with private creditors is likely weighing on capital flows,” chief investment officer for UK-based Emerging Markets Investment Management Ltd., Ayodele Salami, told Bloomberg.
“Both countries are unlikely to attract fresh capital inflows until the ongoing debt restructuring negotiations are concluded,” Salami said.
Salami added that the naira, along with other African currencies, is facing pressure due to increased domestic demand for dollars, particularly to cover the costs of importing raw materials and commodities, including oil.
