Nigeria Macro Update: Nigeria's Naira Crisis - FX Shortages, Debt Disclosures, and the Path Forward

Following the Central Bank of Nigeria’s (CBN) decision to phase out Dutch auctions, the naira has resumed its slide toward all-time lows. Various economic developments have contributed to this trend, but a sense of limbo has returned.

NNPC Debt Disclosures

As political protests faded in late August, the parallel Naira rate remained around 1,600. The market awaited a catalyst for the next major rate shift. Still, news of debts owed by the Nigerian National Petroleum Corporation (NNPC) to international oil traders triggered a negative market reaction. Although the NNPC later denied owing $6.8bn, reports of fuel shortages due to suspended oil orders were sufficient to increase the parallel rate.

In response, the CBN intervened by selling dollars to bureaux de change (BDCs) and local banks at discounted rates, opting against a fresh Dutch auction. However, the impact was minimal as market participants recognised the limited liquidity these moves provided. Dollar inflows remain critical to stabilising the naira.

Domestic USD Bond Issues

With Eurobond issuance on hold pending the US Federal Reserve’s next policy moves, Nigeria’s Debt Management Office (DMO) launched a $500m domestic dollar bond sale, the first tranche of an announced $2bn. The auction cleared with an impressive 180% bid-to-cover ratio, raising $900m at a 9.75% yield—slightly above secondary market Eurobond yields. While the result exceeded expectations, its impact on the FX market has been muted.

Another domestic source of USD liquidity came from the windfall tax on banks' FX-related profits. Stanbic IBTC, in particular, reported a modest profit hit from the tax, sparking speculation about how effectively some banks are navigating the policy. While unlikely to make major headlines, this remains a story to watch.

Replenishing USD Reserves

Foreign direct investment (FDI) inflows have slowed again after a brief uptick, exemplified by Singapore’s Tolaram Group purchasing Guinness Nigeria. With FDI stagnating, there are growing murmurs that Nigeria may approach the IMF. Such a move would likely come with austere fiscal conditions, complicating an already delicate political climate. However, the IMF has continued to endorse government efforts to distribute cash to alleviate poverty.

To preempt IMF conditions, fiscal tightening and increased tax scrutiny may be on the horizon. The Tinubu administration is pushing for a VAT increase from 7.5% to 10%, though this could reignite public unrest. Exemptions for low-income earners may soften the blow, but enforcement will be challenging given Nigeria’s chronic issues with tax collection.

Crypto Developments

In an unexpected policy shift, the Securities and Exchange Commission (SEC) has begun scoping out licenses for digital and tokenised assets, despite earlier efforts to shut down peer-to-peer (P2P) platforms like Binance. The move appears aimed at increasing transparency in the FX market to attract foreign investment. However, recent NAFEX rate fluctuations—100-naira swings overnight—are unlikely to inspire investor confidence. A stable exchange rate, even at high levels, remains essential for market stability.

Dangote vs NNPC

Attention has focused on the ongoing negotiations between the NNPC and Dangote Group regarding crude sales for Nigeria’s domestic market. Dangote’s new refinery has begun distributing refined fuels, and NNPC has raised pump prices in response. While there are concerns that further price hikes could spark unrest, the government seems willing to take the risk, given Dangote’s efforts to source cheaper crude offshore.

The details of this deal will be closely watched, as it may become one of President Tinubu’s most significant political challenges.

Looking Forward

As Q3 draws to a close, there are glimmers of hope. Year-on-year inflation has trended lower, albeit still above early 2024 levels, and foreign reserves have increased following the domestic bond sales. The CBN faces its Monetary Policy Committee meeting this month with limited options. Rate hikes, capital reserve requirements, and asymmetric corridors are still in play, but their effectiveness is waning.

While hopes for innovative monetary policy are dimming, we expect more domestic bond issues, and the onus is now on the government to secure international investments that could inject much-needed dollar liquidity into the market.