Nigeria: Naira Shows Mixed Performance as CBN Boosts FX Liquidity and Clears Forward Contracts

In a significant turn of events, the Nigerian naira displayed a mixed performance against the US dollar in the foreign exchange (FX) market. While the official market saw an appreciation in the naira, the parallel market reflected a depreciation, highlighting ongoing supply and demand imbalances.

Over the past week, the Central Bank of Nigeria (CBN) implemented measures aimed at supporting the naira, with interventions that bolstered its strength in the official market. The CBN sold $121 million to authorized dealer banks to enhance liquidity in the forex market amid sustained pressure on the local currency.

However, the black market exchange rate remained relatively unaffected. The CBN also sold $20,000 at N1,580 per dollar to Bureau de Change (BDC) operators as dollar volumes in the informal currency market remained tight.

Further positive developments in Nigeria’s FX inflows are expected, following the successful issuance of a $900 million domestic US dollar bond, which was significantly oversubscribed due to attractive yields. As a result, the naira appreciated by 3% against the US dollar, closing at N1,546.41 on Friday, according to data from the FMDQ platform.

Conversely, the naira weakened by 0.3% at the parallel market, trading at ₦1,650 per dollar. Despite this, activity in the Nigerian Autonomous Foreign Exchange (NAFEX) window saw a 6.2% improvement, with volumes increasing to $1.3 billion from $1.2 billion in the previous week.

In the FX futures market, the value of open contracts for the naira totaled $111.7 billion, according to Afrinvest Capital Limited. The CBN recently cleared all Non-Deliverable Forwards (NDF) contracts, following reforms in the NAFEX window, rendering previous contracts inactive.

Afrinvest noted that FX rates are expected to trade within a tight range across various market segments as the CBN continues its efforts to ensure liquidity through sustained interventions. Analysts anticipate that the CBN’s ongoing efforts will provide some level of stability for the naira.

In line with this, Nigeria’s FX reserves recorded a slight increase, reaching $36.865 billion, likely driven by inflows from the recently concluded domestic US dollar bond issuance.

In the forwards market, the naira’s performance varied across different contracts. The 1-month forward contract weakened to N1,668.65 per dollar, while the 3-month contract depreciated by 0.2% to N1,738.32. However, the 6-month and 1-year forward contracts saw an appreciation, rising by 0.2% and 1.1% to close at N1,838.87 and N2,052 per dollar, respectively.

Despite these interventions, analysts at Cordros Capital Limited expect the naira to remain under pressure due to persistent demand-supply imbalances. They pointed out that the CBN’s moderate interventions and weak foreign portfolio investment (FPI) inflows could weigh on the local currency.

In a related development, Nigeria’s crude oil production, including condensates, increased for the fifth consecutive month, rising by 2.4% to 1.57 million barrels per day (mbpd) in August, up from 1.53 mbpd in July, according to the Nigerian Upstream Petroleum Regulatory Commission (NUPRC).

The improvement in output was driven by higher production volumes across key terminals, including Forcados (+16.0%), Bonny (+6.4%), and Odudu (+4.6%). However, declines were recorded at Qua Iboe (-8.0%), Agbami (-6.4%), and Escravos (-4.4%) terminals during the same period.

Despite the positive trend, Cordros Capital analysts noted that Nigeria’s overall crude oil production remains below pre-pandemic levels of 2.14 mbpd. They attributed the shortfall to persistent challenges such as insecurity, aging infrastructure, and low investment in the sector. The exit of international oil companies (IOCs) and unresolved oil asset transfer issues further compound these challenges.

While efforts to combat crude oil theft and pipeline vandalism continue, the analysts warned that these obstacles pose ongoing risks to crude oil production in the near term. Cordros Capital maintained its crude oil production estimate at an average of 1.52 mbpd for 2024, below the government’s budgeted estimate of 1.78 mbpd.