Naira Appreciates By 23.5% Despite Rising Inflation

Despite Nigeria’s headline inflation rate nearing 30 per cent, the Naira appreciated 23.5 per cent leading to projections by experts that FX liquidity conditions are expected to remain tight, pending receipt of expected FX inflows.

Nigeria’s headline inflation rate which was released by the National Bureau of Statistics (NBS) at the weekend, increased to 28.20 per cent in November, marking an increase from the October 2023 rate of 27.33 per cent, the highest since 28.20 per cent recorded in August 2005, owing to rebound in monthly price pressure above its 12-month average at 2.1 per cent (1.7 per cent).

Based on this outcome, inflation is currently averaging 24.1 per cent for 2023, against 18.5 per cent in the comparable period of 2022. According to the NBS, the surge in the headline rate was mainly sustained by the continued pressure on food prices which rose to 32.8 per cent year-on-year (y/y) from 31.5 per cent in October (up 2.4 per cent month-on-month (m/m) vs 1.9 per cent in October). This is the second highest in Africa, behind Egypt’s 64.5 per cent based on available November data.

However, FX traders defied this report as the exchange rate between the naira and dollar rose to N889.86/$1 on Friday at the official market, representing a N12 gain or 1.3 per cent increase in the Naira compared to N904.41 it recorded previously.

Similarly, the naira equally recorded gain at the parallel market where the exchange rate closed at N1245/$1 as against N1260/$1 it quoted on Thursday, representing 1.20 per cent. Furthermore, the nation’s stock market sustained its upward trajectory due to upbeat demand on banking stocks – AccessCorp, UBA and Zenith Bank, driving its All-Share Index (ASI) up by 1.2 per cent w/w to close the week at 72,389.23 points. This meant that the market’s year-to-date (YTD) return improved to 41.2 per cent from 39.6 per cent recorded in the previous week’s transactions.

Although, Nigeria’s FX reserve declined further as the gross reserves level fell by $10.95 million week-on-week (w/w) to close at $32.85 billion (December 13, 2023), analysts have said that they expect further upticks in headline inflation which may be driven by a surge in demand due to upcoming festivities.

Analysts at Coronation Research said, “Inflation continues to be driven by structural issues such as high logistic costs, poor infrastructure, storage issues, exchange rate pressure, elevated cost of PMS as well as insecurity (especially in food-producing areas).

Looking ahead, we expect further upticks in the headline inflation, primarily driven by an anticipated surge in demand triggered by end-year festivities”.

For their part, analysts at Cordros Research said, “Looking ahead, we expect FX liquidity conditions to remain tight, pending receipt of expected FX inflows. Thus, we expect the pressure on the local currency to persist in the near term. Nonetheless, we expect foreign investors to keenly watch the development in the FX space with regards to the expected FX inflows as guided by the authorities, CBN’s recent actions in clearing its FX backlogs, and firm direction of short-term interest rates”.