Recently, the Nigerian currency, the naira, has shown significant improvement in its value compared to the US dollar, reaching its strongest point in eight months. As of last Friday, the exchange rate was around 1,474.78 naira to 1 dollar. This change is happening because there is less demand for dollars due to changes in the government’s economic policies and an increase in local petrol production.
Just a few months ago, on June 3, 2024, the exchange rate was much higher at nearly 1,486 naira per dollar. However, thanks to various factors, including increased local petrol refining capabilities, more money coming into the country, and quick actions taken by the Central Bank of Nigeria (CBN), the naira has gotten stronger.
A key factor in this improvement has been the Dangote Petroleum Refinery, which started refining petrol at a capacity of 650,000 barrels per day in September 2024. This new facility is crucial because it helps Nigeria produce its own petrol, which has been a significant issue for the country due to a shortage of fuel.
Also, in the months following the refinery’s opening, Nigeria’s petrol imports dropped to their lowest levels in eight years. Reports indicate that during a recent period in late January, petrol shipments into Nigeria were only about 110,000 barrels per day. This decrease in petrol imports is essential because imports account for a significant portion of Nigeria’s need for foreign currency—around 22-25% of its total demand.
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Experts say that the current lower demand for dollars is largely because fuel importers are no longer looking for as many dollars to buy petrol. Additionally, the CBN has cleared its backlog of foreign exchange requests, and there has been an increase in money flowing into the country from overseas bonds sold last year.
Furthermore, demand for dollars across different sectors of Nigeria’s economy has fallen by about 11%, going from $6.4 billion in the second quarter of 2024 to $5.7 billion in the third quarter. This decrease is mainly due to a reduction in “invisible transactions,” which typically include things like travel expenses and online purchases.
Looking ahead, Uche Uwaleke, an academic who studies capital markets, believes the naira’s strength will continue into 2025. He predicts this because Nigeria is expected to import less petrol and food, while also exporting more fuel. He emphasizes that as Nigeria’s ability to refine and export oil improves, it should lead to more money flowing into the country, which will further strengthen the naira.
Additionally, early in 2024, Nigeria saw a surge in foreign exchange inflows, amounting to 136% of everything that came into the country during 2023. This influx includes a significant amount raised by the government through dollar bonds.
In December 2024, the Nigerian government launched a new Eurobond offering to help finance its budget. This includes a six-and-a-half-year bond and a ten-year bond with attractive interest rates. The Minister of Finance has noted that these financial strategies are aimed at completing the government’s borrowing obligations and accessing international financial markets effectively.
The CBN has made moves to improve the stability and transparency of the foreign exchange market through new systems and rules, like the recently introduced Electronic Foreign Exchange Matching System (EFEMS). These changes are intended to create a more orderly forex market, making it easier for everyone involved.
In conclusion, as Nigeria continues to refine its own fuels and reduces its reliance on imported petrol, the naira is expected to maintain its strength, benefiting the country’s economy overall.
