Naira’s fortune reverses from top to world’s worst-performing currency

Onome Amuge

Nigeria’s naira has plunged from grace, transitioning from the world’s top-performing currency in March to the worst-performing in April, as revealed by a recent Bloomberg report.

The report unveils the naira’s downward trajectory, highlighting its rapid descent after a brief stint in the limelight. As the local currency embarks on another round of free fall, concerns regarding Nigeria’s economic stability are mounting. 

The report posited that the central bank is now likely to increase interest rates at its next monetary policy meeting on May 21, in an effort to stem the tide of this free-falling currency.

Between February and March, the CBN implemented a series of aggressive interest rate hikes, totaling a record 600 basis points, which brought the benchmark rate to 24.75 percent. This decisive move aimed to curb inflation and stabilise the naira.

In addition to the rate hikes, the CBN resumed selling $10,000 to Bureau de Change operators every week in February. This strategic intervention helped to alleviate dollar shortages and put a check on the sale of the currency on the street, contributing to the naira’s rebound. As a result of these concerted efforts, the naira saw a significant appreciation, strengthening to as high as N1,000 to a dollar. This recovery allowed for a convergence between the parallel and official market rates, restoring some semblance of stability to the Nigerian foreign exchange market.

Unfortunately, the naira appreciation was short-lived. As reported recently, the naira took a sharp dive, falling to a one-month low of 1,470 against the dollar in the parallel market, also known as the black market. 

Traders have identified a surge in demand for dollars for educational, healthcare, and tourism purposes as a primary catalyst for the naira’s decline. This mirrors the currency’s all-time low in February when it neared N2,000 to a dollar on the street, while trading at N1,600/$ on the official window.

With the next monetary policy meeting scheduled for May 21, all eyes are on the central bank as analysts anticipate additional interest rate hikes to combat inflation and stabilise the naira’s value.

Razia Khan, Standard Chartered’s chief economist for Africa and the Middle East, shared her insights with Bloomberg regarding the potential impact of naira futures worth an estimated $1.3 billion maturing at the end of this month. Khan anticipates that this development could dampen market sentiment, stating, “The belief is that this will create more demand for dollars.”

According to Khan, “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.”

Commenting on the report, Abubakar Muhammed, the chief executive of Forward Marketing Bureau de Change Ltd., a data monitoring firm in Lagos, attributed the decline in naira’s value to heightened demand from individuals and small businesses. 

This increased demand for foreign currency, particularly the US dollar, has put significant pressure on the naira, causing it to depreciate against the dollar and other major currencies.

Joining Nigeria’s naira on the list of worst-performing currencies last month were Zambia’s kwacha and Ghana’s cedi. The kwacha hit an all-time low of 27.3969 per dollar, while the cedi weakened to 13.99 against the dollar, marking its lowest level since 2022. Both nations are currently embroiled in ongoing debt restructuring processes, which have added to the volatility of their respective currencies.

Ayodele Salami, the chief investment officer for UK-based Emerging Markets Investment Management Ltd, shared his insights with Bloomberg regarding the economic challenges faced by Ghana and Zambia. 

Salami noted that delays in reaching a debt restructuring agreement with private creditors have likely had a negative impact on capital flows in both countries.

The prolonged negotiations and uncertainty surrounding the debt restructuring process have contributed to a decline in investor confidence, making it more difficult for Ghana and Zambia to attract much-needed foreign investment. This, in turn, has exacerbated the economic difficulties these nations are experiencing, as access to capital is crucial for driving growth and development.

“Both countries are unlikely to attract fresh capital inflows until the ongoing debt restructuring negotiations are concluded,” he added.

Expanding on the challenges faced by the naira, Salami explained that the Nigerian currency, along with other African currencies, is under significant pressure due to heightened domestic demand for dollars. This demand, he stated, is largely driven by the need to cover the costs of importing essential raw materials and commodities, including oil.