Nigeria’s FX Market Struggles to Regain Stability Amid CBN’s Dollar Intervention

Nigeria’s FX market struggles continue as the Central Bank of Nigeria’s (CBN) latest effort to stabilize the naira has fallen short of expectations. On August 6, 2024, under the new governor, Olayemi Cardoso, the CBN injected a record $815 million directly into businesses, marking the largest single-day intervention in recent history. Despite this significant move, the naira’s value remains largely unchanged, trading at N1592 per dollar on August 20, compared to N1601 before the intervention, reflecting only a marginal improvement of 0.5 percent.

Market observers had anticipated a stronger appreciation of the naira following the CBN’s action. However, the hoped-for gains have not materialized, signaling that the FX market’s deep-seated issues may require more than sporadic interventions to resolve. The CBN had intended this sale to alleviate the mounting pressure on the naira by addressing unmet foreign exchange demand, but the currency has yet to show signs of substantial recovery.

Investor confidence, which has been severely shaken by years of erratic FX policies and opaque financial practices, has not been fully restored despite the CBN’s efforts. Foreign investors remain cautious, with many concerned about the lack of transparency regarding Nigeria’s foreign reserves and the government’s financial health, particularly in light of the reintroduction of the petrol subsidy.

Foreign portfolio inflows have declined, as evidenced by a six-month low in new investments in Nigeria’s stock market, recorded at N37.57 billion in July. This reluctance extends to the bond market, where foreign participation has dwindled in recent months.

The sporadic nature of the CBN’s interventions has further exacerbated the situation. Businesses and currency traders alike express frustration over the lack of a consistent pattern in the CBN’s dollar sales, which has led to increased pressure on the naira and a loss of confidence in the market.

Since last year’s reforms aimed at finding a market-determined rate for the naira, the currency has plummeted by over 100 percent, from N460 to N1,592 per dollar, despite the CBN’s attempts to tighten liquidity and boost investor confidence. The black market, where the naira recently dropped to a new low of N1,610 per dollar, continues to reflect the severe scarcity of dollars.

The FX market’s ongoing struggles highlight the lasting damage caused by years of mismanagement. Under former CBN governor Godwin Emefiele, the market suffered from artificial rates and acute dollar shortages, driving businesses to the black market and deterring foreign investment.

Although new CBN governor Olayemi Cardoso has returned to orthodox monetary policies and initiated necessary market reforms, it is becoming increasingly clear that restoring the FX market to stability will be a long and challenging process. The lack of experienced traders, unfamiliar with true market-making after years of constrained trading conditions, further complicates the road to recovery.

As Nigeria continues to grapple with these issues, it’s evident that sustained and strategic interventions, alongside restored investor trust, are crucial to revitalizing the nation’s FX market.