Nigeria’s forex market has yet to stabilise, Fitch says

• Fitch Ratings says Nigeria’s forex market is yet to stabilise
• The position of Fitch differs from that of the IMF
• CBN has always maintained its commitment to addressing forex market challenges

Global rating agency, Fitch Ratings, says Nigeria’s foreign exchange (forex) market has yet to achieve stability, and its ongoing flexibility remains to be tested.

The agency noted that measures taken by the Central Bank of Nigeria (CBN) to stabilise the forex market, such as raising the Monetary Policy Rate (MPR) and introducing an electronic forex matching platform for all transactions, have not yielded the desired result.

Fitch said, “The Central Bank of Nigeria is initiating several measures to address FX liquidity challenges and formalise FX activity to support the currency. These include plans to introduce an electronic FX matching platform for all FX transactions effective December 1, 2024, to provide intra-day prices in real-time and enhance transparency.

“The CBN has also raised the monetary policy rate five times by a cumulative 850bp to 27.25 per cent since February 2024. However, Fitch believes that the FX market has yet to stabilise, and the ongoing flexibility of the exchange rate remains to be tested.”

Fitch’s report differs from the IMF’s

The report by Fitch Ratings differs from the recent report of the International Monetary Fund (IMF), which noted that with the recent interest rate hikes and CBN’s efforts to meet outstanding forex obligations, the naira was gaining some stability.

The IMF’s Global Financial Stability Report noted that the Nigerian authorities’ actions, especially the CBN’s efforts to clear overdue FX commitments, are responsible for the naira’s stabilisation.

It stated, “Policy actions by local authorities have also resulted in positive developments; for example, in Nigeria, rate hikes and the clearing of overdue domestic central bank foreign exchange obligations have helped the naira show more signs of stability.”

Fitch acknowledged increased gross forex reserves

The global rating agency also noted an increase in Nigeria’s gross forex reserves, which increased to $39 billion in mid-October from $32.1 billion in mid-April.

It said the increase is due to official disbursements, remittances, portfolio inflows and an improved trade balance.

Fitch said, “We forecast FX reserves to rise to 6.1 months of current external payments at end-2024 (‘B’ median 3.7) and to average 5.3 months in 2025-26.”

On true net reserves, Fitch called for caution, noting that about a quarter of current gross reserves are comprised of FX swaps with local banks.

“There is significant uncertainty over the size of net reserves. We estimate that around one-quarter of current gross reserves are made up of FX swaps with local banks, although we expect most of these to continue to be rolled over."

CBN maintains a commitment to addressing forex volatility

The CBN has always maintained its commitment to addressing the country’s forex volatility challenge.

At a press conference at the end of the 2024 IMF/World Bank Annual Meetings in Washington, recently, CBN governor Olayemi Cardoso said the apex bank has taken steps to eliminate challenges in the forex market.

Volatility in the market has put pressure on the naira, resulting in the depreciation of the currency, as it lost 40 per cent of its value in the first half of 2024 and recently depreciated by 43 per cent and is one of the worst-performing currencies on the African continent,

At the IMF/World Bank meetings, Cardoso noted, “We have eliminated the front-loading of the FX demand. We reaffirm the CBN’s commitment to addressing the challenges ahead.

“In recognising that much still needs to be done to fully achieve our goals, our path forward includes consolidating and sustaining the current progress through an efficient, transparent market system and deepening financial and economic inclusion, particularly for small businesses, households, women and young people across Nigeria by leveraging smarter technologies and remote banking solutions we aim to reduce transaction costs and expand financial access, ensuring that every Nigerian regardless of location or demography can meaningfully participate in our evolving financial system.

“Regardless of our commitment to orthodox monetary policy, let me reiterate our determination to follow this path through a sequenced approach in tackling challenges ahead.”

Cardoso says naira floating was a tough but necessary step to close official, parallel FX rates

Meanwhile, TheRadar reported that the governor of the Central Bank of Nigeria (CBN), Olayemi Cardoso, said the floating of the naira was necessary to close the gap between the foreign exchange (forex) rates at the official and parallel markets.

Cardoso noted that though the decision was tough, it had to be taken to align the forex rate with market realities to halt arbitrage and speculation that undermined market trust.