Nigeria’s foreign exchange market remains unsettled, according to Fitch Ratings, despite an array of recent policy initiatives from the Central Bank of Nigeria (CBN). The agency’s assessment, published in its latest report, underscores the persistent challenges facing the naira, contrasting with a cautiously optimistic note from the International Monetary Fund (IMF), which recently acknowledged signs of currency stabilisation due to CBN’s tighter monetary policies and efforts to clear foreign exchange (FX) backlogs.
In its Global Financial Stability Report, the IMF pointed to interest rate hikes and overdue FX obligations being addressed as factors that have “helped the naira show more signs of stability.” Nevertheless, Fitch’s analysis suggests caution, noting that true stabilisation remains elusive despite the CBN’s active interventions. “The Central Bank of Nigeria is taking multiple steps to address FX liquidity issues and to formalise FX activities, including the launch of an electronic FX matching platform on December 1, 2024,” Fitch observed. This platform aims to provide real-time intra-day pricing and increased transparency in the FX market.
However, Fitch maintained that these measures might not suffice to fully stabilise the market, as the naira continues to face exchange rate volatility. In response to inflation, the CBN has raised the monetary policy rate five times in 2024 alone, now reaching a high of 27.25%. Yet Fitch cautioned that further testing of this approach will be needed, particularly as structural imbalances remain unaddressed.
The rating agency also highlighted a positive trend in Nigeria’s FX reserves, which increased to $39 billion by mid-October from a low of $32.1 billion earlier this year. This improvement is attributed to a mix of official disbursements, remittances, and stronger trade balances amid lower imports and domestic refining capacity. However, Fitch emphasised that the effective reserve figure is likely lower, as a significant portion is tied up in FX swaps with local banks.
CBN Governor Olayemi Cardoso expressed cautious optimism, stating that confidence in the naira is “gradually returning.” Speaking at a World Bank event, he attributed this to CBN’s orthodox policy measures aimed at fostering confidence in the currency, adding that the exchange rate fluctuations reflect underlying market fundamentals rather than direct CBN control. “We are committed to stability,” Cardoso said, stressing the importance of transparency in FX management and cautioning against market manipulation.
In practice, however, the naira’s volatility has continued to affect Nigeria’s economy, as highlighted in a recent report by Stanbic IBTC Bank Nigeria. The report, part of the Purchasing Managers’ Index (PMI) for October, found the private sector under acute pressure as currency weakness and high costs for fuel and transportation intensified inflationary strains. With the PMI at a 19-month low of 46.9, Stanbic IBTC noted a marked contraction in business conditions. “The combination of currency pressures and high prices has driven input costs up sharply,” said Muyiwa Oni, Head of Equity Research for West Africa at Stanbic IBTC, adding that growth in the non-oil sector will remain “weak,” with inflation and interest rates impeding private sector performance.
Despite these challenges, the CBN’s new Electronic Foreign Exchange Matching System (EFEMS), set for a December 1 launch, is seen as a potential game-changer. The EFEMS aims to provide a more transparent and accessible platform for interbank FX transactions, fostering a public-facing, market-driven exchange rate. The CBN has scheduled a two-week pilot phase for the platform in November, which will determine its efficacy in enhancing transparency and boosting confidence in the naira.
While efforts are underway to address longstanding issues, Nigeria’s private sector is likely to face continued strain in the short term. Analysts suggest that an improved FX framework, coupled with robust trade policies and further interest rate adjustments, may help build greater resilience over time.
