With the naira already trading at below ₦1,200 to the US dollar on both the official forex and black markets, one of the world’s top investment banks believes the local currency could be No.1 in its performance this month.
Goldman Sachs projects the naira will emerge as this month’s best performing currency relative to the greenback. The turnaround comes after the naira plumbed record lows earlier this year amid acute foreign exchange shortages and galloping inflation.
However, the tide has dramatically shifted since mid-March. According to figures published by the FMDQ Group Plc, the naira has appreciated a little shy of 40% since mid-March to trade at around ₦1,150 per dollar in the parallel market.
It hit a 4-month high of ₦1,050 per USD in the black market last Monday. In the official forex market, the local currency touched a four-month peak of ₦1,136.04 per dollar on the same day.
However, Goldman cautions that sustaining the naira’s recovery will not be an easy walk in the park. They cited uncertainty over the Tinubu government’s ability to maintain the reform momentum. Of course, global markets and dynamics, such as the surging conflicts in Ukraine and Gaza, will have a tangible impact on the naira.
As Nigeria’s economy grapples with many challenges, from soaring prices to dwindling foreign reserves, the fate of the naira remains closely intertwined with global dynamics. Just as companies offering demo roulette and other digital services keenly monitor market trends, investors and policymakers must remain vigilant in assessing the naira’s long-term trajectory.
CBN’s monetary policy actions behind naira’s surge
The naira’s rally against the dollar is largely thanks to a series of aggressive monetary policy actions undertaken by the Central Bank of Nigeria (CBN) to restore stability and curb inflation.
Faced with spiraling inflation and depleted forex reserves, the CBN delivered a cumulative 600 basis points of interest rate hikes across its February and March monetary policy meetings. These front-loaded rate increases were aimed at reining in price pressures and shoring up the naira.
Complementing the rate hike, the central bank has also implemented measures to unclog bottlenecks hampering dollar liquidity in the economy. The issue had previously driven businesses towards the parallel market for dollar exchanges. The naira’s exchange rate on the official FX market had drifted towards the black market level since Q4 2023, according to Reuters.
“The naira’s recovery has been remarkable…if this trajectory continues, the Nigerian currency could potentially outshine all others globally in April,” remarked Kamran Mahmoud, an emerging markets strategist at Goldman Sachs.
Revised forecast for naira upbeat
The economists at Goldman Sachs have ratcheted up their projections for the naira amid its dizzying rally. As recently as February, Goldman had forecast the local unit would strengthen to around ₦1,200 per dollar by year-end 2024.
However, the naira’s pace of appreciation has compelled the investment bank to envision even rosier outcomes. “This probably can run further; we would see an extension of the move to ₦1,000 and maybe even sub-1,000,” Goldman’s Andrew Matheny told reporters.
Such ebullience over the naira’s prospects would have been unthinkable mere months ago when it appeared in free-fall. Yet the CBN’s forceful actions have lent credence to the narrative of an economy steadying itself after years of forex crises.
Compared to Africa’s biggest economies and currencies, naira is almost the only one that has rallied against the dollar since the start of April. At N1150 per dollar, it has appreciated 7.2%, while the South African rand has slipped nearly 2% since April 9. The same goes for the Kenyan shilling (-0.5%), Zambian kwacha (-1.5%), and Ghana cedi (-0.4%).
Lingering economic challenges
Still, Goldman’s revised bullish forecasts for the naira come with a dose of caution and skepticism over the sustainability of the current momentum.
“It’s still early days of the central bank rebuilding its credibility,” Matheny cautioned in his remarks to Bloomberg. “We don’t have high conviction that they’re going to stay the course.”
Indeed, for all the naira’s gains of late, Nigeria’s economic landscape remains fraught with sizable economic challenges. Inflation has spiraled to multi-decade highs above 33%, eroding purchasing power and leaving scores of citizens mired in poverty despite the currency’s rebound.
Other structural bottlenecks could also restrain the naira’s ascent. Oil production – a key driver of forex inflows – has been declining as the sector grapples with operational inefficiencies and security risks. This limits Nigeria’s ability to capitalize on elevated global crude prices.
Moreover, foreign reserves remain low at under $32.6 billion, enough to cover just 6 months of imports. Central bank’s forex war chest has been steadily depleting amid efforts to support the naira and plug capital outflows.
While the naira rebound should help in containing inflation in the coming months, Nigeria faces a raft of other cost pressures. This month alone, electricity prices have gone up threefold in Lagos and other urban regions. Tinubu’s government is also in talks with labor unions about hiking the minimum wage come May.
Wrapping up
For now, the Nigerian authorities appear resolute in defending the naira’s recent gains at all costs. But questions linger over how sustainable these force-backed measures truly are in the longer run.
“There are questions about how socially sustainable this strategy will be,” said Matheny. “We’ll have to be watching developments closely to assess whether this rally has legs.”
One key determinant will be whether the aggressive rate hikes, which have stoked fears of compounding economic hardships, manage to tame inflation decisively in the coming months. The CBN may be afforded greater flexibility in unwinding its tightening if prices start rapidly decelerating.
