Naira at inflection point, consolidates around N740/$ for six months

• Historical data support bullish sentiments

Naira has consolidated at a narrow range – between 730-N750/$ – at the parallel market for upward of six months. It is about the longest stretch the local currency has traded without major volatility (a measure of the extent of deviation from the average) in recent years.

Until towards the end of last year, naira traded at a wide swing with each week setting a new price range and the rate changing thrice during some trading sessions.

At the height of the exchange rate crisis, dollar spiked to N880/$. The Guardian reported that whereas politicians were mopping the market to prosecute their political ambitions, speculators had turned the currency into an article of trade.

But the local currency has gained stability as the year-end approached, marking the end of the high volatility witnessed in the past few years.

Since then, the currency has been cooling, trading at N730-750 in what could be interesting as an inflection point, a curve at which a change of direction is necessary.

Whereas it may be difficult to guess when to expect a clearer market direction (whether naira would gain or lose against a basket of other currencies), the biggest factor that may trigger a change is how the market perceives the next administration in the first few days in office.

Announcing fuel subsidy removal, for instance, could send a strong signal of an administration that is open to bold economic and market reforms. From Nigerian experts to international fronts, there have been calls on the administration to take courageous decisions that would unlock the potential and set the pace for pro-market reforms.

In the past eight years, President Muhammadu Buhari has not taken a firm position on the controversial subsidy payment even though it admitted that it is a major drain on public resources. With about two weeks to the end of the last and second tenure, Buhari is counting on his successor to bite the bullet and do away with the social safety net on June 1.

The World Bank, International Monetary Fund (IMF) and other development partners whose impressions go a long way in influencing the international investment market are on the wing watching to see how the President-elect, Bola Tinubu handles the issue next month.

If he makes a good impression, the much-needed foreign capital that would stabilise the troubled currency could start pouring in again. That would imply a much-stronger naira.

In the past four years, capital inflow has been on a reducing balance. From 2019, when the mandate of the outgoing President, Muhammadu Buhari, was renewed till last year, capital inflow to Nigeria dipped by 78 per cent. From a record-high of $24 billion, Nigeria received a total inflow of $5.3 billion last year.

Whereas the restrictive global monetary framework is partly blamed for the steep fall, some experts also attribute the shortfall to the rigidity of the foreign exchange (FX) market, insecurity, inconsistent policies among others.

Tinubu came in on the mantra of ‘Renewed Hope’. He committed to subsidy removal, market reform, growth of the private sector and liberalisation, which experts believed, could be game changers if implemented.

But the market has not started pricing in the subsidy removal yet, suggesting that market makers are still uncertain about the near-term outlook, leaving naira to continue to struggle to find a new path.

If the currency breaks the N750/$ resistant point, analysts forecast, the currency could dip into the N800-N900 range. But historical data do not support a breakdown, at least not in the near term.

After the 1999 transition to civil rule, the naira steadied against the dollar at N22/$ for a while before it lost hold. A similar trend played out after the 2007 transition. Then, the local currency even gained value, rising from over N120/$ prior to the election to N115/$ until towards the end of 2018.

When Buhari took up the reins of government in 2015. The path to what later turned out to be one of the steepest falls of the currency was gradual. A few months after Buhari’s inauguration, naira held steadily against its pairs.

If the trend continues, the current stability in the parallel market, especially, could continue in the next few months before naira eventually finds a new path.