$6 Billion Gain Pushes Reserves to New Heights as Naira Strengthens Amid Investor Confidence
Nigeria’s foreign exchange (forex) reserves surged by $206.16 million, closing at $38.88 billion, marking a continued rise in reserves and boosting confidence in the naira. The country’s reserves have grown by $5.97 billion this year, reaching their highest level since the end of 2023 when they stood at $32.91 billion.
Key Drivers of Reserves Growth
Market insiders attribute this steady build-up to increased investor confidence, with foreign portfolio investors (FPIs) driving record trading activity. FPIs have reached their highest turnover in five years, contributing significantly to the forex market. The naira also appreciated by 2.5%, closing at N1,600.78 per dollar in the Nigerian Autonomous Foreign Exchange Market (NAFEM). The Central Bank of Nigeria (CBN) sold $64 million to authorized dealers, further supporting the currency.
Stable Outlook for the Naira
Analysts from Cordros Capital maintain an optimistic outlook, suggesting that increased forex inflows will stabilize the naira in the short term. They expect the CBN to continue intervening in the forex market, aided by rising FPI inflows. The inflow of foreign investments has spurred a 194% increase in FPI transactions this year, totaling N655.47 billion compared to N222.78 billion in the same period last year, the highest in five years.
Increasing Foreign Investor Participation
Foreign investor participation has grown significantly, now accounting for nearly one-fifth of total market transactions. The latest data from FMDQ Securities Exchange showed a 21.4% rise in total inflows into the NAFEM, which climbed from $1.92 billion in July 2024 to $2.34 billion in August 2024. Stronger inflows from both domestic and foreign sources have been the main contributors.
Private Sector Contributions and CBN Involvement
Private sources have driven much of the domestic inflows, with individual contributions increasing by 162.5% between July and August 2024. However, inflows from the CBN fell by 53.7% over the same period. Experts suggest the sustained rise in foreign reserves will continue to support naira stability, especially as the government implements economic reforms to boost crude oil production and diversify the economy.
Positive Market Sentiment
AIICO Capital’s Managing Director, Dr. Femi Ademola, noted that the increasing foreign inflows reflect rising optimism among foreign portfolio managers. This renewed confidence could lead to stronger market stability and support Nigeria’s foreign exchange position.
Arthur Steven Asset Management’s Managing Director, Mr. Olatunde Amolegbe, echoed this sentiment, adding that the growing reserves will enhance liquidity and help stabilize the exchange rate.
Professor Uche Uwaleke, President of the Association of Capital Market Academics in Nigeria, also emphasized that rising forex reserves position the CBN to better meet its forex obligations and combat market volatility.
IMF and CBN Optimistic About Economic Reforms
The International Monetary Fund (IMF) has praised Nigeria’s macroeconomic reforms, citing improved oil production and ongoing social welfare programs as positive indicators for future growth. Central Bank of Nigeria (CBN) Governor, Dr. Olayemi Cardoso, affirmed that the bank’s efforts, alongside the Ministry of Finance and the Nigerian National Petroleum Company Limited (NNPCL), will improve forex inflows and reserves.
Dr. Cardoso emphasized that a market-driven exchange rate policy, coupled with reduced petroleum imports, will support forex market stability in 2024. This, in turn, is expected to enhance investor confidence and attract more foreign investment.
Focus on Transparency and Market Integrity
The CBN aims to uphold market transparency, ensuring fair exchange rate determination to foster a stable environment for businesses and individuals. Dr. Cardoso believes the naira is undervalued, and with coordinated fiscal measures, genuine price discovery will occur in the near term. This approach is anticipated to lead to a more stable exchange rate.