The Central Bank of Nigeria (CBN) marked a significant milestone in May 2024 by achieving its highest dollar sales in a single month. The CBN intervened robustly in the foreign exchange market, selling $575 million to address a drop in foreign investment inflows, according to data from FMDQ Securities Exchange.
This figure eclipses the combined total of $340 million sold in April ($151 million) and March ($189 million). Additionally, in February, the CBN had resumed dollar sales after a five-month hiatus, offloading $392 million to banks.
Despite this substantial intervention, May’s dollar sales represented only 6.6 percent of the $5.89 billion market turnover for the month, excluding the final day of trading.
The Nigerian foreign exchange market has been grappling with declining liquidity due to exchange rate instability and persistent inflation, which has deterred foreign investors. Data from FMDQ indicates a sharp decline in market turnover, with $5.89 billion traded in the first 30 days of May—a 35 percent decrease from $9.12 billion in April and a 53 percent drop from $12.6 billion in March.
“The CBN had to intervene last week to support the naira due to low dollar liquidity,” a source familiar with the matter stated.
Facing over $1 billion in Non-Deliverable Forwards, the lower exchange rate following the CBN’s dollar sales resulted in reduced payouts for the bank, the source explained.
In its busiest week of dollar sales in nearly a year, the CBN intervened on three separate occasions. On May 29, it achieved its highest single-day sale of 2024 by offloading $141 million. Combined with sales of $98 million and $126 million on May 27 and 28, respectively, the week’s total reached $365 million—exceeding the combined totals for March and April.
Another source informed BusinessDay that the CBN’s dollar sales were also aimed at absorbing naira liquidity. “The CBN faced futures maturities leading to a potential liquidity injection of up to N1 trillion. With a tightening stance, they had to either sell foreign exchange or conduct Open Market Operations (OMO), and they opted for both,” the source said.
Selling FX helped appreciate the naira amidst dollar liquidity issues and rising rates, while also serving as a naira liquidity extraction mechanism, the source elaborated.
Despite these efforts, the naira’s value fell from a one-month high of N1173 per USD on Tuesday to N1485.99 by Friday, May 31, compared to N1482.81 on May 24. Bismarck Rewane, CEO of Financial Derivatives Company, predicts the naira will stabilize between N1350 and N1450 over the next 12 months.
Foreign investors remain cautious about Nigeria due to naira instability. Data from Tellimer Ltd. shows a nearly 20% drop in investor inflows into the forex market in April, with a daily average of $200 million, further declining to $180 million in early May. Foreign portfolio inflows into the stock market also fell to N42.58 billion in April from N52.66 billion in March. The outlook for May is lower due to ongoing banking recapitalization efforts, which deter investment in Nigerian bank shares.
Coronation Merchant Bank analysts noted that rising inflation (33.69% in April) and stagnant market rates have made local currency bonds less appealing to foreign investors. The CBN’s recent 150 basis-point rate hike to 26.25% hasn’t significantly increased market interest rates. While a 1-year T-bill yield at 25.07% is double last year’s rates, it still trails behind the inflation rate, resulting in negative real returns. FGN bond yields are generally lower than 1-year T-bill yields.
Foreign investors are also concerned about repatriation risks, preferring markets in Egypt, Turkey, and Pakistan over Nigeria.
In its latest move to boost dollar supply, the CBN announced on Friday that international oil companies can now sell their retained 50% of repatriated export proceeds in the Nigerian Foreign Exchange Market. Previously, these companies were required to sell to the CBN, with restrictions on transferring crude export proceeds to offshore parent company accounts. The revised policy permits 50% repatriation at once, with the remaining 50% for settling local obligations. This move aims to ease forex market pressure and provide the CBN with resources to defend the naira when necessary.
