Naira's outlook is brightening amid steps to steady currency

Nigeria’s prolonged battle to stabilize its currency is finally bearing fruit, with analysts now forecasting the battered naira could rebound sharply before the end of the year.

Analysts at Goldman Sachs Group Inc, Citigroup Inc. and Standard Chartered Plc see the naira advancing by as much as 25% against the dollar this year, as jumbo interest-rate increases and other steps to attract foreign capital yield results.

The naira has been devalued twice since June after newly-elected President Bola Tinubu ended Nigeria’s longstanding practice of fixing the exchange rate, alongside other reforms to lure foreign money and boost the economy.

While the process has been painful, with the currency sliding 70% against the greenback to a low of 1,627 earlier this month, the naira has steadied in recent days. Further, the gap between the official and unofficial market rate has narrowed sharply.

Razia Khan, chief economist for Africa and the Middle East at Standard Chartered, sees the naira ending 2024 in a 1,200-1,300 per dollar range. “In more benign conditions, we could test even 1,100 naira a dollar or lower,” she said.

That optimism is buoyed by a series of measures to support the currency, including a massive 400 basis point increase in interest rates by the central bank last month to 22.75%, with more tightening expected when its policymakers meet again in late March.

“Some of the forex backlogs have been cleared, monetary policy has been tightened and the transmission mechanism of policy is more effective,” Khan said.

New leadership installed by Tinubu at the central bank under Governor Olayemi Cardoso have enacted a series of measures to free up the naira and boost local dollar liquidity.

The naira rose 0.4% to 1,602 naira a dollar on Friday, according to broker FMDQ, the most recent day for which data are available. The official rate is slightly stronger than the parallel market rate of 1,610 naira/dollar.

The rate has been within 3% either side of the parallel-market rate in the past two weeks, compared to a spread of more than 30% in January.

Goldman Sachs analysts including Kamakshya Trivedi and Caesar Maasry predicted that the naira could rally to 1,200 a dollar as investors seek richer returns from sovereign debt issued by frontier markets.

Yields on Nigeria’s 12-month notes rose to 21.5% at the auction this month, 450 basis points higher than the previous sale on Jan. 19, with foreigners buying almost fourth-fifths of the 1.053 trillion naira on offer, lured by the sharply higher yields.

“The currency is deeply undervalued. Interest rates are rising. Oil production is recovering. This combination suggests there’s room for the naira to recover some, but not all, of its lost ground,” Yvonne Mhango, an economist said.

Nigeria’s liquidity-boosting measures are starting to pay off: Foreign-investor portfolio asset purchases exceeded $1 billion in February, bringing total inflows this year to at least $2.3 billion, compared with $3.9 billion for the whole of 2023, according to the central bank.

Overseas remittances rose more than fourfold to $1.3 billion in February from a month earlier, it said.

The central bank is expected to increase benchmark interest rate again at its March 25-26 meeting, said Tatonga Rusike, sub-Saharan Africa economist at Bank of America Corp.

“We still expect another 200 basis points hike in March meeting, then pauses thereafter,” Rusike said. “Our year-end forecast for naira is 1,550 a dollar and a 2025 level of 1,500 a dollar.”