The naira is gaining at official and parallel markets. It closed at N1,535 to a dollar on Friday, December 6, from N1,567/$ on Thursday, December 5, at the parallel market, popularly called the black market.

This was a remarkable appreciation when compared with the October 14 price of N1,700/$ and October 28 rate of N1,740 at the parallel market.

At the official market, the naira closed at N1,535 on Friday compared to Thursday’s rate of N1,567 at the Nigerian Foreign Exchange Market (NFEM). This marked a N32 reduction over the one-day period.

Several Nigerians are asking why this is happening and whether this will be sustainable. The simple answer is that this is down to the Central Bank of Nigeria (CBN)’s recent monetary policies, which have now instilled confidence in the market. Is this sustainable? Not yet.

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The CBN under Dr Yemi Cardoso has pulled its weight on Nigeria’s monetary policy side. Apart from floating the foreign exchange market and clearing the forex backlog owed several organisations before his appointment, Mr Cardoso recently floated dollar bonds and Eurobonds which are helping to restore confidence in the foreign exchange market.

Dollar bonds

The Nigerian government raised over $900million from the first-ever domestic Federal Government of Nigeria (FGN) US dollar bond issue, which was 180 percent subscribed due to its 9.75 percent interest rate, which is considered attractive.

“The 180 percent subscription and the broad participation in the bond reflect confidence in our economy,” Nigeria’s Finance Minister and Coordinating Minister of the Economy, Mr Wale Edun, said after the transaction.

“Better days lie ahead for the Nigerian economy as we diversify our funding sources and continue to deepen our capital markets.”

However, this was not about Mr Edun but about the monetary instruments deployed majorly by the CBN to attract dollar inflows, analysts say.

Eurobonds

Secondly, last week, Nigeria issued two new tranches of eurobonds in the international capital market totaling $2.2 billion, comprising 6.5-year notes maturing in 2031 and 10-year, due in 2034.

The $700 million and $1.5 billion notes were placed in the 2031 and 2034 maturities, respectively, priced at coupon and re-offer yields of 9.625 percent and 10.375 percent respectively. 

Unsurprisingly, the deal attracted more than $9 billion subscription from investors from multiple jurisdictions, including the United Kingdom, North America, Europe, Asia, Middle East. Again , this was due to its attractive yields and, of course, the confidence in the Nigerian market.

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“The outcome underscores the growing confidence of investors and the resilience of the Nigeria credit, and evidence of our improved liquidity position and continued access to international markets to support the financing needs of the government,” said CBN Governor, Mr Cardoso, after the transaction.

“The essence of the dollar bonds is to have more foreign exchange inflows into the economy. When you have that, you meet the demand for dollars and then boost your naira,” said Economic Professor at a North-Central university, Anselm Gwa.

“This is something that the dollar bond and the Eurobond are meant to achieve and are gradually achieving.”

Rising portfolio investments amid high returns

The university teacher further said that foreign portfolio investors had been participating in the Nigerian market, leading to dollar inflows into the economy and naira appreciation.

“When you also look at the foreign portfolio investments, you notice that it is gradually picking up due to the rising investor confidence.”

True to Professor Gwa’s analysis, foreign investment in Nigeria’s equities markets stood at $150 million in the second quarter (Q2) of 2024, representing a 204 percent jump from $49.4 million recorded in the first half of 2024, the National Bureau of Statistics (NBS) said.

Foreign portfolio in Nigeria generally stood at $1.4 billion in Q2 of 2024 from $107 million reported in the corresponding period of 2023.

Foreign portfolio investors bet on stocks, bonds, treasury bills (T-bills) and other market instruments. They are mostly driven by high returns (yields) and good policies. Yields on Nigerian T-bills have been attractive. It hit 30.71 percent at last Wednesday’s CBN auction and later closed at 29.75 percent. This is attractive and closer to Nigeria’s inflation rate – which investors consider.

EFEMS’ impact

The CBN recently introduced the Electronic Foreign Exchange Matching System (EFEMS). EFEMS, kicked-off last Monday, is an electronic platform introduced to tackle speculation and improve transparency in Nigeria’s FX market. It matches buy and sell orders automatically, and helps to boost transparency and fairness in the forex market.

“Without credibility, no policy, however well-intentioned, can succeed. Floating the
naira, a decision met with considerable public criticism, was necessary to bring the official exchange rate closer to market reality. The disparity between the official and parallel rates had encouraged arbitrage and speculation, eroding trust in the market,” Mr Cardoso said while addressing Harvard Club of Nigeria Lagos in October 2024.

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“Credibility is earned by consistency. The decision to close this gap, while painful in the
short term, sent a message to market participants that the CBN was committed to
transparency and sound monetary policy,” he added, noting that speculative trading had been reduced, and stability was gradually returning to the currency markets.”

However, unless there is an increased dollar supply by way of exports, this will not be sustained next year. Alternatively, if there is lower imports of basic items such as petrol, food and other essential products, the demand for dollars will reduce and the naira will strengthen further.

Issues remain

Amid Mr Cardoso’s policies which analysts say are working, there are issues that he is struggling to resolve, one of which is high inflation. Mr Cardoso has raised the monetary policy rate (MPR), which is the benchmark interest rate, six times this year to control inflation, but that is not yet working.

Last month, the apex bank raised the MPR by five basis points to 27.50 percent in November, from 27.25 per cent in September 2024. 

Since Mr Cardoso became CBN governor in September 2023, he has raised the MPR from 18.75 percent in February 2024 to 27.50 percent in 2024, representing 875 basis-point period in 15 months. This was targeted at reining in inflation.

But inflation has failed to recede. Nigeria’s inflation rate rose to 33.88 percent in October 2024, up from 32.70 percent in September.

Even when inflation eased to 32.15 percent in August 2024 from 33.40 percent in July, the Nigerian government deregulated the petrol market and raised the product’s price.

The Chief Executive Officer, Centre for Centre for the Promotion of Private Enterprise (CPPE), Dr Muda Yusuf, said “raising interest rates is not helping to tame inflation.”

He said the fiscal policy side, made up the finance minister and security chiefs, among others, should deploy the necessary tools to deal with supply issues driving inflation, such as insecurity and logistics.

Hence, Mr Cardoso has failed to deal with inflation, even though he claims otherwise. Economy Post pointed out in September that Mr Cardoso-led Monetary Policy Committee (MPC) is oiling the wheels of poverty in Nigeria – with lending rates reaching 35-40 percent in various banks.