Naira Faces Growing FX Liquidity Risk Amid Economic and Geopolitical Challenges
The Nigerian naira is facing increasing pressure in the foreign exchange market as it depreciated to N1,580/$ in the parallel market on Friday, down from N1,590/$ on Thursday. Despite the global strength of the U.S. dollar, Nigeria’s reliance on crude oil and foreign exchange earnings from fossil fuels is worsening the currency’s vulnerability. Negative factors such as weak demand for oil, rising OPEC+ production quotas, and ongoing political tensions in Nigeria, particularly with militant threats to the oil infrastructure, contribute to the naira’s struggles. Additionally, Nigerian Bureau de Change operators have criticized commercial banks for not supplying enough foreign currency, further exacerbating the situation.
Economic Strain and Declining Foreign Portfolio Investment (FPI): Nigeria’s economic environment is strained as foreign portfolio investment (FPI) inflows continue to dwindle. Despite efforts by the Central Bank of Nigeria (CBN) to raise yields on Treasury bills, demand for one-year T-bills has fallen significantly, indicating growing investor caution. At a recent auction, the demand for T-bills sharply declined to N861 billion from N1.5 trillion, marking its lowest point this year. The country’s dependence on oil, compounded by the challenges of oil theft and pipeline vandalism, further undermines efforts to stabilize the naira and its economy, making optimistic production growth projections appear unlikely.
Inflation Outlook Amid Currency Challenges: Despite the difficulties, Nigeria has seen a slowdown in inflation, with the country’s inflation rate dropping to 23.18% in February from 24.48% in January. This marks the first reduction in inflation for 2025, which was attributed to a combination of factors including lower energy prices, a more stable naira, and adjustments in Nigeria’s inflation index. This decrease provides some relief to Nigerians, even as the broader economic outlook remains uncertain due to currency instability.
Global Market Context and U.S. Dollar Strength: Globally, the U.S. dollar has strengthened amid investor expectations that the Federal Reserve will maintain higher interest rates for a longer period. The U.S. Dollar Index rose as the market absorbed the Fed’s stance on interest rates, which remained unchanged. Meanwhile, geopolitical uncertainties, including tensions in Turkey, Gaza, and Ukraine, are contributing to a flight to safety, with investors increasingly turning to U.S. Treasuries. This global uncertainty, alongside domestic challenges, continues to put pressure on Nigeria’s currency and broader economic stability.
source: naira metrics