Forex Inflows into Nigerian Trading Channel Rise by Almost a Quarter

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The abolition of multiple forex rates by the Central Bank of Nigeria (CBN) has contributed to a 23.8% increase in total foreign exchange (forex) inflows into the Investors and Exporters Window (IEW) in June 2023. The IEW serves as the convergence market for forex trading in Nigeria. The sustained growth in inflows, observed for the second consecutive month, signals improved forex liquidity and a more stable naira.

Data from the FMDQ revealed that foreign inflows experienced the highest percentage increase of 44. 3%, amounting to $298.8 million. Domestic inflows also saw a positive growth of 19.3% to reach $1.11 billion in June. This increase was primarily driven by higher inflows from non-bank corporates and exporters.

Analysts at Cordros Capital anticipate that the ongoing monetary policy reforms will have a positive impact on the forex market in the medium term. However, foreign investors may adopt a cautious approach as they await further actions from the CBN to address forex backlogs and determine the direction of short-term interest rates amid high inflation.

While positive policy actions by the government are encouraging, risks still persist. The naira continues to hover around N800 per dollar, and the supply of forex into the market remains limited. Banks are gradually adjusting to market forces, and the next adjustment is expected to follow the appointment of a new cabinet.

In a move towards greater transparency, the FMDQ Securities Exchange recently revised the computation methodologies of the NAFEX and IEW spot rates, shifting from a contributions-based model to a transactions-based model. This change aligns with global benchmark administration trends and the ongoing reforms in the domestic forex market. Additionally, the decision to allow international oil companies (IOCs) to sell dollars to banks is expected to increase forex liquidity in the IEW and support the local currency.

Foreign portfolio investments (FPIs) in the Nigerian investment market have also shown significant improvement, with total FPI transactions rising by 338.72% and inflows increasing by 649.6%. These positive developments reflect growing confidence among foreign investors in the Nigerian market.

Opinion: The increase in forex inflows and the CBN’s efforts to streamline forex rates are positive steps towards achieving a more stable forex market and economic growth. However, it remains crucial for the government to address lingering challenges, such as limited forex supply and the need for policy consistency, to sustain this positive momentum and attract further foreign investments.

Thenation.

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