4 Reasons For Naira’s ‘Magic’ Recovery

The naira’s recent “magic” recovery from N1700 to N1500 per dollar in less than two days has sparked widespread discussion. For months, Nigerians have witnessed a steady decline in the value of the naira, leading to increased inflation and higher costs of living. But suddenly, the tables turned.

This sharp recovery did not happen by chance. Several factors played a significant role in boosting the value of the naira. These include Nigeria’s Eurobond inflow, the launch of the Central Bank of Nigeria’s (CBN) Electronic Foreign Exchange Matching System (EFEMS), the influx of funds from returnees (popularly called I.J.G.Bs), and the activities of crypto investors. Here’s a breakdown of these four key factors driving the naira’s recovery.

1. Eurobond Inflow Boosts Dollar Supply

One of the major factors responsible for the naira’s recovery is Nigeria’s successful Eurobond issuance. The country approached the international market seeking to raise $1.5 billion but ended up securing $2.2 billion due to high investor demand. Nigeria offered investors a rate of over 9%, which was too attractive to resist. Investors rushed in with offers worth $9 billion, but the government only accepted $2.2 billion. This amount counts as an inflow of dollars into Nigeria.

This inflow triggered the basic economic principle of demand and supply. Since more dollars entered Nigeria’s economy, there was increased availability of foreign currency. The greater the supply, the stronger the Naira became. With additional dollars flowing into the system, banks and financial institutions were better positioned to meet demand for forex, pushing down the dollar-to-naira rate.

2. CBN Launches New Forex Trading System

Another major development that strengthened the naira was the Central Bank of Nigeria’s (CBN) unveiling of its Electronic Foreign Exchange Matching System (EFEMS). This system, launched in December, allows for transparent and efficient forex trading through Bloomberg and BMatch platforms.

The EFEMS is a platform where banks, individuals, and businesses can buy and sell foreign currencies in a more open and transparent environment. Before now, banks were holding on to dollars, but with EFEMS, they can now see all available buyers and sellers in real time. As a result, banks that have been hoarding dollars are now selling them off.

With this system in place, forex transactions have become more transparent, fair, and efficient. The Central Bank of Kenya adopted a similar system earlier in January 2024. The increased availability of forex on this transparent platform has contributed significantly to the strengthening of the naira. The more forex is made available, the less demand there is for it, causing the value of the Naira to rise.

READ ALSO: Black Market Dollar (USD) To Naira (NGN) Exchange Rate Today, 9th December 2024

3. Increased Dollar Inflow From I.J.G.B Returnees

Every December, many Nigerians living abroad return home for the festive season, commonly referred to as “I.J.G.Bs” (I Just Got Back). These returnees usually bring in foreign currencies, particularly dollars, to spend on family, friends, and celebrations. Right now, many fintech companies have excess dollars because of the large influx of funds coming in from Nigerians abroad. This has created a situation where supply exceeds demand, and the exchange rate has dropped significantly.

With more people exchanging their foreign currencies for naira, there is a natural boost in forex supply. The increased availability of dollars makes it easier for people and businesses to access the currency, thereby reducing the pressure on the naira. This annual trend has, once again, played a significant role in the Naira’s recent “magic” recovery.

4. Crypto Investors Cash Out For December Spending

Crypto investors, commonly referred to as “crypto brothers,” also played a part in the naira’s rise. Many crypto traders who made significant profits from cryptocurrencies have been cashing out their digital assets to spend in Nigeria during the holiday season. December is that time of the year when people want to spend. Crypto investors who have made money from Bitcoin, Ethereum, and other assets are exchanging their earnings for Naira. This is adding to the inflow of dollars into Nigeria’s economy.

This surge in dollar-to-Naira exchanges by crypto investors contributes to the excess supply of dollars in the market. With fewer people demanding dollars and more people exchanging them for Naira, the Naira’s value increased, further reducing the dollar-to-Naira rate.

The naira’s rapid recovery from N1700 to N1500 per dollar is not magic but the result of specific financial, economic, and seasonal factors. Nigeria’s Eurobond inflow, the introduction of the CBN’s EFEMS, the influx of I.J.G.Bs, and crypto traders cashing out have all contributed to an increase in dollar supply and a subsequent boost in the value of the Naira.

While this recovery is a welcome relief for Nigerians, it remains to be seen how long these factors will sustain the Naira’s stability. For now, the hope is that strategic policy moves like the EFEMS will continue to strengthen the Naira in the long term.