The naira is expected to experience a significant rebound following the successful issuance of a $500 million diaspora bond and the reintroduction of the Retail Dutch Auction System (RDAS). Analysts, including Bismarck Rewane, Managing Director of Financial Derivatives Company (FDC) Limited, predict that these developments, along with potential actions by the U.S. Federal Reserve, will support the naira in the coming weeks.
In the FDC Economic Bulletin for August, Rewane highlighted that the diaspora bond was issued to boost remittances and attract investment, which will contribute to stabilizing the naira. The proceeds from the bond, coupled with the CBN’s reintroduction of RDAS, are expected to reduce inflationary pressures, particularly with the upcoming harvest season and import duty waivers playing supportive roles.
The report also noted that global attention is focused on the upcoming U.S. Federal Reserve meeting, with expectations of an interest rate cut. A reduction in U.S. rates could weaken the dollar, thereby strengthening the naira, which is currently trading at N1,625 to the dollar. Additionally, higher global oil prices are expected to improve Nigeria’s trade balance and revenue, potentially easing external debt repayment pressures.
Despite the positive outlook for the naira, the FDC report cautioned that the Central Bank of Nigeria (CBN) might maintain a tightening stance at its next Monetary Policy Committee (MPC) meeting in September. This could pose risks to Nigeria’s economic growth, as highlighted by the recently released GDP report showing that 78% of the 46 economic activities tracked by the National Bureau of Statistics (NBS) experienced either a slowdown or contraction in the second quarter of 2024.
The CBN has taken several measures to stabilize the exchange rate and boost dollar liquidity, including authorizing dealers to provide personal and business travel allowances through debit or credit cards instead of cash. Additionally, international money transfer operators are now required to maintain a minimum operating capital of $1 million and operate within the formal market to foster market confidence and close the gap between official and black market rates.
Moreover, the CBN-led MPC has raised the Monetary Policy Rate (MPR) by 600 basis points to 26.75%, aiming to curb inflation, attract foreign capital inflows, and correct exchange rate misalignment. These efforts are part of a broader strategy to ensure a sustainable recovery for the naira.
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