Nigeria: Naira Weakens as CBN Foreign Payments Surge by 11%

The naira continued its downward trajectory in the foreign exchange market, depreciating by 0.7% week-on-week to N1,678.87 per US dollar at the Nigerian Autonomous Foreign Exchange Market (NAFEM). This decline occurred despite the Central Bank of Nigeria’s (CBN) intervention, which included a sale of US$51 million to authorized dealers. With the December automation of FX systems approaching, market participants are hopeful that enhanced governance will curb sharp practices and speculative trading.

Amid efforts to manage outflows, a recent CBN report highlighted a significant increase in foreign currency expenditures. The CBN’s data revealed that its foreign payments grew by 11.3% year-on-year, reaching US$4.36 billion in the first seven months of 2024, up from US$3.92 billion during the same period in 2023. This surge in foreign payments indicates that devaluation alone has not sufficed to curb certain FX obligations, even as the exchange rate worsens.

A deeper analysis of the report shows that a substantial portion of the increase in foreign payments was driven by foreign debt servicing costs, which rose by 53.6% year-on-year to USD2.78 billion from USD1.81 billion. These expenses largely covered repayments of multilateral and bilateral loans, with foreign debt service payments constituting 63.8% of total international payments over the period.

Conversely, payments for letters of credit declined by 57% year-on-year to US$391.91 million from US$912.36 million in July 2023. Analysts at Cordros Capital attributed this reduction to weaker import demand due to inflationary pressures and subdued consumer spending.

The report also showed a slight 0.8% year-on-year dip in direct remittances to USD1.18 billion, reflecting a decline in payments for international services by Nigerian residents. According to Cordros Capital, international payments are expected to remain elevated, primarily due to the government’s foreign debt obligations.

The foreign exchange reserves crossed the US$40 billion threshold for the first time in nearly three years, rising by USD270.10 million week-on-week to close at USD40.04 billion on Friday. Meanwhile, total turnover at the NAFEM decreased by 12.8% to USD814.11 million in the official window, with transactions conducted within the N1,591.60 to N1,700.00 band.

In the forwards market, the naira weakened across one-, three-, six-, and twelve-month contracts. The one-month forward contract depreciated by 0.9% to N1,714.79, while the three-month contract fell by 0.6% to N1,775.34. The six-month forward contract decreased by 1.0% to N1,867.26, and the twelve-month contract dropped by 0.9% to N2,042.33 per US dollar.

Cordros Capital observed the sustained growth in FX reserves and noted that the CBN’s cautious approach toward reserve management is likely to continue, supporting measured interventions in the FX market to ensure stability.