Nigeria’s embattled naira has staged a remarkable rebound in recent weeks, appreciating to around 1,200 per U.S. dollar on the official market. This is a far cry from the record low of 1,851 naira hit just last month amidst a prolonged U.S. dollar crunch.
The recovery comes after the Central Bank of Nigeria (CBN) cleared a backlog of $7 billion in overdue foreign exchange obligations through an independent audit process. The bank has also lifted restrictions to allow deeper foreign investor participation in its fixed-income auctions.
“We made clearing the FX backlog a priority to restore credibility and confidence in the Nigerian economy,” CBN Governor Olayemi Cardoso stated. Independent auditors vetted over $1.5 billion in transactions to verify legitimate claims.
However, significant distortions remain in Nigeria’s foreign exchange market. On the parallel market, the naira trades around 1,340-1,500 per dollar – a wide premium over the official rate. Currency traders attribute this to lingering dollar shortages.
“While forex liquidity has improved, it is still well below pre-pandemic levels and a boost in dollar supply will be needed to support further naira appreciation,” said Patrick Curran, economist at Tellimer Research.
To tame double-digit inflation, the CBN hiked interest rates by 200 basis points to 24.75% – one of the highest levels globally. While this could help rein in prices, critics warn such tight monetary policy could constrain economic growth.
“The central bank’s emphasis on mopping up liquidity will rebuild policy credibility,” wrote analysts at Goldman Sachs. “But with this policy mix, businesses and consumers will feel the bite of high borrowing costs.”
On the fiscal side, lower oil exports due to production constraints and crude theft have dwindled Nigeria’s main source of foreign exchange. The government is considering a Eurobond issuance to raise funds from international capital markets.
But questions persist about deeper reforms needed. “While clearing the FX backlog is positive, what structural adjustments will Nigeria implement to sustainably improve its external position?” posited one analyst.
Experts point to longstanding issues like an unsustainable fuel subsidy regime, over-reliance on oil exports, foreign exchange restrictions, and underdeveloped manufacturing as bottlenecks hindering economic resurgence.
As it stands, Nigeria’s forex reserves of $34 billion remain relatively healthy but well below pre-pandemic levels. With global interest rates rising, economists debate how much more dollar liquidity is required to durably stabilize the naira’s exchange rate.
“The outlook is fraught with uncertainties despite the naira’s recent recovery,” surmised one economist. “Regaining market confidence hinges on addressing deeper-rooted ailments weighing on Nigeria’s economy and its currency’s credibility.”
