Naira Strengthens Against U.S. Dollar in Black Market: Causes, Implications, and Future Outlook

As of early February 2025, the Nigerian naira has demonstrated a notable appreciation against the U.S. dollar in both official and parallel (black) markets. development is significant, considering the naira's historical volatility and the economic challenges Nigeria has faced in recent years.

cent Performance of the Naira

In the official foreign exchange market, data from the FMDQ Securities Exchange indicates that the naira strengthened to ₦1,478.78 per dollar on January 31, 2025, up from ₦1,485.95 traded the previous day.

Similarly, in the parallel market, the naira appreciated do ₦1,627 against the Dollar on January 30, 2025, marking a 1.39% increase from the ₦1,650/$ recorded on January 24.

Factors Contributing the Naira's Appreciation

Several factors have contributed to the recent strengthening of the naira:

1. Central Interventions: The Central Bank of Nigeria (CBN) has been proactive in implementing measures to stabilize the naira. The introduction of the Electronic Foreign Exchange Matching System (EMS) in December 2024s is one such initiative. EFEMS is designed to ensure transparency and efficiency in the foreign exchange market by automatically matching buy and sell orders, thereby reducing speculum and promoting fair pricing.
2. Foreign Exchange Code Implementation: On January 28, 202 the CBN officially launched the Foreign Exchange (FX) Code to promote best practices within the financial sector. The FX Code aims to strengthen and enhance the integrity and functioning of Nigeria's wholesale FX market, facilitating a better-functioning market and bolstering the country's flexible exchange rate regime.
3. Reduced Demand for the Dollar: Currency traders, also known as buree change (BDC) operators, have reported a decrease in demand for the dollar. This reduction in demand has contributed to the naira's appreciation in the parallel market.

4. Government Policies*: The Nigerian government's decision to allow the Nigerian National Petroleum oration (NNPC) to sell crude oil in naira to local refineries, including the Dangote refinery, is expected to ease price on foreign exchange rates. This policy aims to reduce the monthly demand for exchange by approximately $610 million, leading to annual savings of $7.32 billion.

Implications for the Nigerian Economy

The appreciation of the naira holds several initial implications for Nigeria's economy:

• Inflation Control: A stronger naira can help reduce the cost of imported goods thereby aiding in controlling inflation. Lower import costs can lead to decreased prices for consumers, improving purchasing power and overall economic welfare.
• Investor Confidence: Currency stability is a critical factor for investors. The recent appreciation of the naira may boost foreign investor confidence, and potentially add to increased investments in various sectors of the economy.
• Foreign Exchange Reserves: Policies that reduce the demand for foreign exchange, such as the sale of crude oil in naira, can help conserve Nigeria's foreign exchange. This conservation is vital for maintaining the country's ability to manage external shocks and meet international obligations.

Challenges considerations

Despite the positive developments, several challenges and considerations remain:

• Sustainability of Appreciation: Maintaining the naira's strength requires continuous and effective implementation of monetary and fiscal policies. Any lapses could lead to a reversal of the gains achieved.
• External Economic Factors: Global economic conditions, such as fluctuations in oil prices and international interest rates, can impact the naira's value. Nigeria's reliance on oil exports makes it vulnerable to external shocks.
• Parallel Market Dynamics: While the official exchange rate has shown improvement parallel market still operates with a significant premium. Bridging the gap between the official and parallel market rates remains a challenge.

Future Outlook

The outlook for the naira will depend on several factors:

• Continued Policy Implementation: The sustained implementation of policies like EFEMS and the FX Code will be crucial in maintaining transparency and efficiency in the foreign exchange market.
• Economic Diversified: Reducing dependence on oil exports by diversifying the economy can help insulate the naira from external shocks. Investments in sectors such as agriculture, manufacturing, and technology could prov alternative revenue streams.
• Global Economic Environment: Monitoring global economic trends and adapting domestic policies accordingly will be essential. Engaging with international partners and financial institutions can also provide support in times of economic uncertainty.

Conclusion

The recent appreciation of the Nigerian naira against the U.S. dollar is a positive development, reflecting the effectiveness of recent policy measures and interventions. However, sustaining this momentum will require an ongoing commitment to sound economic policies, continuous monitoring of both domestic and global economic conditions, and proactive adjustments as necessary. By addressing the underlying challenges and leveraging the current positive trends, Nigeria can work towards achieving long-term currency stability and economic prosperity.