Foreign exchange speculators are facing huge losses as the naira continues to gain stability against major currencies. Despite a 3.2% month-on-month dip in Nigeria’s external reserves to $38.46 billion by the end of February, the naira appreciated by 8.5% in the parallel market, reaching 1,490/$ during the same period.
At the Nigerian Foreign Exchange Market, the local currency has gained 2.69% year-to-date, trading at 1,499.23/$, although it depreciated slightly by 1.7% in February, closing at 1,500/$ in the official market.
The sustained appreciation has sent shockwaves through the ranks of forex speculators, with analysts estimating losses of about N10 billion in February alone. The Central Bank of Nigeria (CBN) has implemented various measures to curb volatility and stabilise the forex market, making speculative trading increasingly unprofitable.
CBN’s Crackdown on Forex Market Distortions
In a decisive move, the CBN introduced the Nigerian Foreign Exchange Code on January 28 to enhance transparency and ethical conduct in the forex market. This, alongside the Electronic Foreign Exchange Matching System (EFEMS), has significantly reduced speculative attacks on the naira.
Forex analyst Michael Nwadike observed that those hoarding dollars are incurring losses as more holders sell off in the open market. He advised investors to reconsider their strategies in light of the current naira rally, urging authorities to introduce policies that attract long-term capital and improve investment conditions in Nigeria.
“There should be policies to attract longer-term investments instead of short-term speculative trading. Reforms in infrastructure, ease of doing business, and a more liberal currency regime are key to sustaining forex market stability,” Nwadike said.
The impact of these reforms is evident, with the naira rebounding strongly across different market segments, much to the dismay of forex traders banking on volatility. A Lagos-based forex trader, Olakunle Amos, acknowledged that the stabilisation is beneficial to the broader economy but unfavourable to speculators facing capital losses. “Now is not the time to hoard dollars. The naira is regaining strength quickly,” he remarked.
Experts Weigh In on Naira Stability
Former CBN Director and professor of international economic relations, Jonathan Aremu, described the naira’s steady appreciation as a positive development. He urged the CBN to focus on increasing productive activities in the economy to sustain this trend.
“The money supply must match economic transactions to achieve a lasting impact. Policies should not just target liquidity but also boost production and supply,” he stated.
Aminu Gwadabe, President of the Association of Bureaux De Change Operators of Nigeria, reaffirmed the CBN’s commitment to managing forex demand and supply effectively. He acknowledged the high demand for forex in sectors such as manufacturing, education, and healthcare but noted that new CBN policies, including the FX code and EFEMS, are attracting more forex inflows into the country.
CBN Governor Olayemi Cardoso highlighted EFEMS as a major success of the exchange rate unification policy, which is expected to enhance price discovery and eliminate speculative distortions in the market. He disclosed that the CBN’s policies have led to an increase in monthly remittances, from an average of $300 million in 2023 to nearly $600 million by August 2024. Cardoso further emphasised that the CBN remains committed to ensuring exchange rate stability and curbing inflation through sustained monetary policies.
Inflation, Exchange Rate, and Economic Stability
Economic analysts at Comercio Partners predict that Nigeria’s inflation rate could drop to 15% in the first half of 2025, driven by a stabilising naira, improved forex liquidity, and the normalisation of energy prices. The launch of the Dangote Refinery is also expected to reduce energy price volatility and lower production costs across various industries.
To sustain exchange rate stability and curb inflation, the Monetary Policy Committee (MPC) recently held the Monetary Policy Rate (MPR) at 27.50%, with other key parameters unchanged.
IMF on Dollarisation and Global Forex Trends
The International Monetary Fund (IMF) noted that dollarisation remains challenging in economies with persistent inflation and exchange rate volatility. However, it warned that reversing the trend of saving in dollars is often difficult.
Interestingly, data from the IMF’s Currency Composition of Official Foreign Exchange Reserves shows a gradual decline in the US dollar’s share of global reserves, with currencies like the Chinese renminbi gaining traction. The Chinese government’s push for renminbi internationalisation through cross-border payment systems and digital currency initiatives is reshaping global forex markets.
With the CBN tightening controls on speculative forex activities and implementing reforms to attract stable forex inflows, the era of uncontrolled naira depreciation seems to be ending.
While this is good news for businesses and the general economy, forex speculators face an increasingly hostile market where hoarding dollars is no longer a profitable strategy.