Financial experts have expressed concerns over the Central Bank of Nigeria’s (CBN) low net foreign exchange (FX) reserves and its defence of the naira, which have sparked risk-off sentiments among foreign investors and limited inflows from Foreign Portfolio Investors (FPIs).
Analysts at Cordros Security highlighted these points in their pre-Monetary Policy Committee (MPC) notes ahead of the third meeting of the year on May 20th and 21st.
FX inflows into the Nigerian Autonomous Foreign Exchange Market (NAFEM) fell by 48.1% to $1.95 billion in April, down from $3.75 billion in March. This decline was significantly driven by a 68.9% reduction in inflows from FPIs, which fell to $478.10 million from $1.54 billion in the previous month.
Financial Analyst Esther Mayowa noted, “Despite weak inflows from FPIs, the CBN’s intervention in various market segments has been frail and irregular, given its weak net FX reserves. Total inflows from the CBN into the NAFEM market declined by 35.1% to $98.00 million from $151.00 million in March. Additionally, while the CBN maintained dollar sales to Bureaux De Change (BDCs) and commercial banks, the total FX supplied remained insufficient to alleviate the pressure in the FX market.”
As a result, the naira weakened to a low of NGN1,533.99/USD in the NAFEM market on May 16, down from NGN1,072.74/USD on April 17. The naira also fell by 34.0% to NGN1,515.00/USD as of May 16 from NGN1,000.00/USD on April 16.
Experts have urged the MPC to address the naira’s depreciation in the FX market, attributing it to renewed demand pressure from capital outflows induced by external shocks. Mayowa stated, “We expect the MPC to encourage the CBN to sustain its FX supply to the market to stabilize the naira while maintaining reforms to reduce speculative activities and boost market confidence.”
MPC to Raise Monetary Policy Rate
According to Cordros Research estimates, despite moderation in price increases as evidenced by a decline in month-on-month inflation numbers for April, analysts anticipate a further tightening of the monetary policy rate. Mayowa explained, “A one-month data release showing a slowdown in prices is not sufficient for the MPC to conclude that inflation is under control. Inflation risks are skewed to the upside given the resurfacing currency pressures and the anticipated review of the minimum wage.”
She added, “We anticipate a less hawkish stance primarily due to the slowdown in the pace of inflation and the DMO’s reluctance to take interest rates significantly higher in the fixed-income market, given its impact on the Federal Government’s debt burden. Accordingly, we expect the MPC to raise the MPR by 100 basis points to 25.75% while holding other parameters constant.”
Naira Grapples with Price Discovery
The naira appreciated by N90 in the parallel segment of the FX market last Friday, closing at N1,450/$1 compared to the previous day’s rate of N1,540/$1. This positive trend extended to the official NAFEX window, where the naira appreciated by N36.66, closing at N1,497.33/$1 from N1,533.99/$1 on Thursday.
This data represents a 2.1% depreciation week-to-date but marks a 2.5% gain from the N1,593.9 recorded a day earlier, which was the weakest since March 20 this year. Daily turnover for the week also rose from $608.5 million to $991.9 million, representing a 63% increase week-on-week.
