The fundamentals of the Nigerian currency have improved amid lower headline inflation readings and ongoing reforms by the Central Bank of Nigeria (CBN) aimed at boosting foreign exchange (FX) remittances.
Data from the National Bureau of Statistics (NBS) showed that Nigeria’s headline inflation rate slightly declined in April, settling at 23.71% year-on-year compared to 24.23% in March.
Africa’s most populous country experienced a surge in inflation, reaching multiple 28-year highs in 2024.
This trend was exacerbated by President Bola Tinubu’s decision to remove costly subsidies and devalue the naira after taking office in 2023.
The International Monetary Fund (IMF) attributed this to the shifting economic outlook but concluded that Nigeria is not yet facing hyperinflation.
These developments have fostered a cautiously optimistic sentiment among investors and traders monitoring the foreign exchange market, even amid persistent economic challenges. Focus on the naira’s performance this week intensifies as the country continues efforts to stabilize its economy and attract foreign investment.
The Nigerian Economic Summit predicted that the naira could strengthen significantly, averaging N1,300 to the US dollar in 2025.
This positive outlook is based on expected increases in foreign exchange earnings driven by higher crude oil sales, revitalized manufacturing output from the oil refining subsector, and improved agricultural productivity. However, recent market activity suggests that investors remain more concerned about price stability than about whether the naira is overvalued or undervalued. The naira has depreciated against the US dollar over the past five decades.
The NBS reweighted the inflation basket and updated the base year as part of a rebasing exercise, causing the annual inflation rate to drop significantly—from 34% in December to 24% in January.
Food and non-alcoholic beverages remained the largest contributors to the annual inflation rate, accounting for 9.49% of headline inflation. Restaurants and lodging services followed at 3.06%, and transportation at 2.53%. The lowest contributors were drugs, alcohol, tobacco, and categories like sport, culture, and recreation.
Food inflation fell sharply to 21.26% year-on-year in April 2024, down from 40.53% the previous month.
The NBS contends that the technical reason for the change in the base year for CPI computation was the marked reduction in annual food inflation.
CBN’s ongoing reforms to boost the Naira
The naira’s fundamentals were further strengthened after the CBN implemented the Non-Resident Diaspora Bank Verification Number (BVN) initiative to encourage FX remittances into Nigeria.
The program, introduced by the Nigeria Inter-Bank Settlement System (NIBSS) in partnership with the CBN, aims to enhance foreign exchange inflows and strengthen Nigeria’s financial ties with its diaspora population.
CBN Governor Olayemi Cardoso reiterated the apex bank’s target of receiving $1 billion in monthly remittances from the diaspora. According to him, maintaining an orderly FX market and fostering participant confidence requires strict adherence to the FX Code and related regulations.
U.S. dollar weakens in global currency markets on dovish Bets
The U.S. dollar fell on Friday along with Treasury yields, as disappointing economic data strengthened bets on further interest rate cuts this year.
Against a basket of currencies, the dollar declined 0.1%, although Monday’s 1.0% gain left it on track for a modest 0.3% weekly increase.
Markets are currently pricing in approximately 56 basis points of rate cuts by the Federal Reserve by December—up from 49 basis points just a day earlier. The benchmark 10-year U.S. Treasury yield fell by seven basis points overnight, closing slightly lower at 4.413%. The two-year note yield dropped one basis point to 3.9608%.
Federal Reserve Chair Jerome Powell noted that policymakers believe the current monetary policy approach requires a reevaluation of key components related to inflation and employment. However, initial market enthusiasm quickly faded, and currency movements diverged.
The dollar dropped sharply against the South Korean won for two consecutive days after it was revealed that Washington and Seoul had discussed currency market developments earlier this month—driving much of the activity in global FX markets.
Asian currency devaluations raise trade pressure
The devaluation of several Asian currencies relative to the U.S. dollar—often seen as a signal of U.S. policy favoring a weaker dollar—has increased pressure on other governments to allow their currencies to appreciate in the context of ongoing trade negotiations.
