The naira weakened further in the foreign exchange market over the week, affected by ongoing market challenges. Efforts to stabilize the local currency continue, with markets looking forward to December’s FX automation, anticipated to enhance forex regulation and curb speculative trading.
The naira depreciated by 0.7% on a weekly basis, settling at N1,678.87 per dollar in the Nigerian Autonomous Foreign Exchange Market. This decline occurred despite the Central Bank of Nigeria’s (CBN) intervention, which involved selling approximately US$51 million to authorized dealers.
Although the CBN has attempted to manage foreign currency outflows, recent data indicates an increase in these outflows. According to the central bank’s latest report, Nigeria’s foreign currency outflows for offshore payments grew by over 11% year on year.
The CBN highlighted that international payments surged at a double-digit rate, despite the recent devaluation of the naira. The bank’s data shows that payments abroad rose by 11.3% year on year, reaching US$4.36 billion in the first seven months of 2024, up from US$3.92 billion in the same period in 2023.
The continued rise in foreign payments suggests that devaluing the naira did not significantly reduce demand for foreign exchange, especially for obligations already set in place, even as the exchange rate further deteriorated.
A closer look at the report shows that the increase in foreign payments was largely driven by a substantial rise in foreign debt servicing and repayments, which soared 53.6% year on year to USD 2.78 billion, up from USD 1.81 billion.
Repayments for matured multilateral and bilateral loans contributed to this figure, with foreign debt services making up 63.8% of total international payments during this period.
On the other hand, payments for letters of credit dropped by 57.0% year on year, totaling US$391.91 million, down from USD 912.36 million in July 2023. According to Cordros Capital Limited, this decline reflects a decrease in imports due to reduced consumer demand, impacted by high inflation.
The report also showed a slight decline in direct remittances, which fell by 0.8% to USD 1.18 billion, influenced by lower international service payments by Nigerian residents. Cordros Capital Limited noted in its update that international payments are likely to stay high due to the Federal Government’s debt obligations.
Analysts suggest that, given the naira’s depreciation and weakened consumer demand from high inflation, letters of credit may remain low in the coming months.ress total non-oil imports.
FX reserves crossed the US$40 billion mark for the first time in 35 months, growing by USD270.10 million week on week to close at USD40.04 billion on Friday. Meanwhile, the total turnover at the NAFEM decreased by 12.8% to USD814.11 million on Thursday in the official window, with trades consummated within the N1,591.60 – N1,700.00 band.
In the forwards market, the naira rates decreased across one, three, six, and one-year contracts. The FX forward contract for one month depreciated by 0.9% to N1,714.79, and the three-month contract fell by -0.6% to N1,775.34 per US dollar. Six-month forward FX contract declined by -1.0% to N1,867.26 while the 12-month contract plunged by 0.9% to N2,042.33.
Cordros Capital Limited noted the sustained accretion in the FX reserves. Analysts highlight that the CBN’s conservative approach towards FX reserve depletion will continue to underpin moderate intervention in the FX market.