Naira Hits Worst Level at 1,466.31/Dollar Amid Dollar Drought

Key Takeaway

• Naira becomes the world's worst-performing currency, sliding to 1,466.31/dollar due to a sharp decline in dollar inflows and local scarcity.
• Central Bank of Nigeria may raise interest rates further after a total 600 basis points increase earlier this year helped reverse some losses.
• Other African currencies like the Zambian kwacha and Ghana’s cedi also face depreciation amid debt restructuring challenges.

Naira's Precarious Slide

Nigeria's naira has become the world's worst-performing currency over the last month, with a significant depreciation to 1,466.31 against the dollar, marking its weakest level since March 20. This downturn is attributed to a local scarcity of the US currency, which saw its availability halve to just $84 million on Thursday. The currency's volatility has been notable since President Bola Tinubu's decision to relax foreign-exchange controls in June, leading to a roughly 68% depreciation against the dollar. Razia Khan, chief economist for Africa and the Middle East at Standard Chartered, highlighted the impending maturity of $1.3 billion in naira futures by the end of the month as a potential exacerbating factor for the currency's weakness.

Central Bank's Interest Rate Dilemma

The Central Bank of Nigeria faces increasing pressure to raise interest rates further in response to the naira's decline, especially with its next policy meeting scheduled for May 21. Earlier rate hikes totaling 600 basis points in February and March had temporarily bolstered the naira, reversing losses from a low of 1,627 naira on March 8 to 1,072 in mid-April. These adjustments were aimed at attracting investors to higher-yielding local assets. However, the naira's continued weakness, even in the unofficial market, underscores the challenges facing the central bank in stabilizing the currency.

Seasonal FX Demand and External Pressures

Danelee Masia, a senior economist at Deutsche Bank, points to sluggish demand from international investors and concerns over dwindling reserves as factors stalling the naira's appreciation. The currency is expected to face further vulnerability due to seasonal FX demand increases in the latter half of the year, driven by corporate demand ahead of the holiday season. Additionally, Nigeria's status as a major oil producer with limited refining capacity necessitates significant dollar outflows for energy product imports, further straining the naira.

Regional Currency Woes and Conclusion

The naira's struggles are not isolated, with other African currencies like the Zambian kwacha and Ghana's cedi also experiencing significant depreciations. Both countries are currently navigating debt restructuring negotiations, which have impacted capital flows and currency stability. Ghana's cedi, in particular, has entered a record-breaking weakening cycle, exacerbated by a slump in cocoa earnings and a resurfacing current account deficit. The broader context of these currency depreciations highlights the complex interplay of domestic policy decisions, external economic pressures, and investor sentiment in shaping currency valuations.

The unfolding scenario underscores the intricate challenges facing Nigeria's central bank and the broader economic implications for the region. As Nigeria grapples with the dual pressures of maintaining currency stability and fostering economic growth, the outcomes of its policy decisions will be closely watched by investors and policymakers alike.

Street Views

• Razia Khan, Standard Chartered (Neutral on the naira):

  "The belief is that this will create more demand for dollars... When the currency appreciated very fast, there had been a bout of profit taking by offshore investors, and this meant that dollar-naira exchange rate backed up again. This is completely in line with the functioning market."

• Danelee Masia, Deutsche Bank (Bearish on the naira):

  "We think the naira is likely to be vulnerable to stronger seasonal FX demand."

• Ayodele Salami, Emerging Markets Investment Management Ltd. (Bearish on African currencies including the naira):

  "Nigeria is one of Africa’s largest oil producers but its limited refining capacity means it is importing most of its energy products, leading to significant dollar outflows... For Ghana and Zambia, the delays with reaching a debt restructuring agreement with private creditors is likely weighing on capital flows."