After months of economic turbulence, there are now encouraging signs that Nigeria’s currency, the naira, may be regaining some stability. This shift comes amid ongoing reforms by the Central Bank of Nigeria (CBN) and a notable decline in headline inflation, sparking cautious optimism among investors and market watchers.

According to new figures from the National Bureau of Statistics (NBS), Nigeria’s annual inflation rate eased slightly in April 2024, dipping to 23.71% from 24.23% in March. While still high, this modest decline offers a measure of relief after inflation reached multiple 28-year highs earlier in the year—largely triggered by the government’s removal of fuel subsidies and the devaluation of the naira following President Bola Tinubu’s economic policy overhaul in 2023.

Despite these challenges, the International Monetary Fund (IMF) has stressed that Nigeria is not yet facing hyperinflation, suggesting that while the economic outlook remains fragile, it is not without hope. That sense of guarded optimism is reflected in FX markets, where attention has turned to the naira’s performance in response to both domestic reforms and international currency trends.

One major development that has boosted sentiment is the CBN’s push to increase foreign exchange remittances. In collaboration with the Nigeria Inter-Bank Settlement System (NIBSS), the central bank recently launched the Non-Resident Diaspora Bank Verification Number (BVN) initiative. This new system is designed to make it easier for Nigerians living abroad to send money home, strengthening both remittance flows and the naira’s underlying fundamentals. CBN Governor Olayemi Cardoso has set an ambitious target—$1 billion in monthly diaspora remittances—signalling just how crucial these inflows are to the broader economic recovery strategy.

In another key move, the NBS reweighted Nigeria’s inflation basket and changed its base year as part of a broader rebasing effort. This technical adjustment played a role in the sharp drop in annual inflation figures, particularly in food prices. Food inflation, which had soared to 40.53% earlier in the year, dropped significantly to 21.26% in April. Food and non-alcoholic beverages remain the main drivers of inflation, accounting for nearly 9.5% of the headline rate, followed by restaurant and lodging services, and transport.

Looking ahead, there are signs the naira could strengthen further. The Nigerian Economic Summit has projected that the currency could average N1,300 to the US dollar in 2025, buoyed by higher oil revenues, renewed manufacturing activity (particularly in refining), and improved agricultural productivity.

Yet despite the positive momentum, market participants remain focused on long-term stability rather than short-term currency valuations. After decades of depreciation, confidence in the naira will likely hinge on sustained reforms and consistent macroeconomic performance.

Meanwhile, international currency markets are also undergoing significant shifts. The U.S. dollar weakened slightly following disappointing economic data and growing speculation that the Federal Reserve will cut interest rates later this year. With markets now pricing in around 56 basis points of rate cuts by December, down from 49 just days prior, U.S. Treasury yields also dipped, reinforcing expectations of a more dovish Fed approach.

The dollar’s retreat has led to diverging movements across global currencies. The South Korean won, for example, posted notable gains after Washington and Seoul engaged in talks on FX developments earlier in the month. At the same time, a wave of devaluations across Asian currencies is adding new pressure on governments to adjust their policies, particularly in light of ongoing trade negotiations.

For Nigeria, these global shifts may present both opportunities and challenges. But with headline inflation trending downward and FX reforms gaining traction, the groundwork appears to be in place for a more resilient naira—if current reforms are sustained and global conditions remain favourable.

Source: nairametrics