Why the naira is strengthening sharply against the dollar

The newly implemented foreign exchange market system by the Central Bank of Nigeria (CBN) has been credited for the recent surge in the value of Nigeria’s currency, the Naira, against major global currencies.

Bankers speaking to Vanguard attributed the Naira’s appreciation to the launch of the Electronic Foreign Exchange Matching System (EFEMS) last Monday.

In a circular issued to banks, the CBN mandated the adoption of Bloomberg’s BMatch platform as EFEMS for forex trading effective December 2, 2024.

The directive urged banks to work closely with Bloomberg representatives to expedite onboarding and address technical issues, emphasizing the CBN’s readiness to enforce compliance and impose sanctions if necessary.

For the first time since May 2024, the Naira recorded five consecutive days of gains in all segments of the forex market last week. It closed at N1,535 and N1,555 to the US dollar in the official and parallel markets, respectively, over the weekend.

A banking executive who preferred anonymity remarked on the system’s success: “The EFEMS provides real-time market insights, facilitating efficient trade matching and market transparency. Since its implementation, the Naira has appreciated, aided by CBN interventions on the platform. While sustainability remains uncertain, we can expect some market equilibrium in the long run.”

This development has significantly reduced the margin between the parallel and official market rates, narrowing it to N20 per dollar from N118 per dollar last weekend.

The Naira’s weekly gain of N168, representing a 9.8% appreciation, marks the largest single-week increase this year.

Data from the CBN and FMDQ revealed a challenging year for the Naira, with sustained depreciation in the official market from N907.11 per dollar in January to a peak of N1,730 in October.

However, the tide began to turn in November, with rates retreating to the N1,600 range. The parallel market similarly saw a sharp depreciation, reaching N1,775 per dollar by the end of November.

Parallel market traders highlighted an unusual surge in dollar availability, which has even left some traders struggling to sell their stock.

Mr. Yakubu Giwa, a trader, noted: “The Naira has appreciated to N1,500 per dollar, and many traders are cautious about buying more dollars due to fears of further appreciation. Seasonal inflows from the diaspora and increased local spending for the festive season are driving this trend.”

The appreciation of the Naira is not limited to the dollar; it has also strengthened against the pound sterling, euro, and other currencies.