Naira Weakens as FX Supply Constraints Persist Across Markets
Nigeria’s currency market came under renewed pressure last week as the naira recorded a fresh bout of weakness across both the official and parallel foreign exchange windows, reflecting lingering supply constraints and sustained demand for dollars by businesses and investors.
Market data showed that the naira depreciated at the Nigerian Autonomous Foreign Exchange Market (NAFEM), reversing modest gains recorded earlier in the month.
By the close of trading, the local currency settled at N1,421.63 to the United States dollar, compared with N1,417.94/$ in the previous week.
The parallel market also mirrored the trend, with the naira exchanging hands at about N1,487/$, underscoring broad-based pressure across currency segments.
Analysts say the latest movement highlights the fragile balance in Nigeria’s FX market, where structural supply shortages continue to outweigh inflows despite policy reforms and gradual reserve accretion.
Naira slips across FX markets amid supply-demand imbalance
Market analysts attribute the recent depreciation to uneven liquidity conditions and heightened demand for foreign exchange, particularly from import-dependent sectors, manufacturers, and offshore investors seeking to repatriate funds.
In its weekly market update, AIICO Capital described trading activities as volatile but confined within a relatively narrow range, shaped largely by supply-demand imbalances at the official window.
According to the firm, the naira began the week under pressure as demand outpaced available dollar supply, leading to an early decline. A brief recovery followed midweek after improved liquidity conditions helped stabilise the market temporarily.
However, by the end of the trading week, the currency resumed its downward trend as supply weakened again.
AIICO noted that the naira depreciated by 26 basis points on a week-on-week basis, translating to a loss of about N3.68 against the dollar. The firm linked the decline directly to “weaker supply levels,” suggesting that inflows were insufficient to meet prevailing FX demand.
Parallel market reflects similar pressure
The pressure was not limited to the official market. The parallel segment, which remains a key barometer of retail and informal FX demand, also recorded depreciation during the period.
Traders attributed the movement to persistent dollar scarcity and increased demand from small businesses, travellers, and individuals seeking foreign currency for education, medical, and import-related expenses.
While the spread between the official and parallel rates has narrowed significantly compared to previous years, analysts caution that sustained supply constraints could widen the gap again if inflows fail to improve.
Cowry Assets Management echoed similar concerns, noting that the naira weakened across both FX windows amid structural challenges that continue to affect the market.
“The naira weakened against the U.S. dollar this week, reflecting persistent demand pressures and underlying FX imbalances,” the firm said, adding that the decline was more pronounced in the parallel market.
Despite the currency pressure, Nigeria’s external reserves recorded a modest improvement during the week, providing some reassurance to market participants. Data cited by analysts showed that external reserves rose by about $111m to approximately $46.01bn.
Analysts said the reserve accretion was supported by steady crude oil receipts, improved non-oil inflows, and a favourable trade balance.
However, they warned that while rising reserves can help boost confidence, they do not automatically translate into increased FX liquidity unless actively deployed to support the market.
Market watchers note that the Central Bank of Nigeria has adopted a more measured approach to FX intervention, preferring market-driven pricing and targeted liquidity management rather than aggressive dollar sales.
Outlook remains cautious
Looking ahead, analysts project that the naira is likely to continue trading within a relatively predictable range in the near term, barring any major improvement in FX supply conditions.
AIICO Capital expects the currency to remain range-bound, supported modestly by steady inflows and reserve accretion but constrained by demand pressures.
Cowry Assets also maintained a cautious outlook, warning that structural imbalances in the FX market could keep the naira under pressure despite recent policy reforms.
“The naira is expected to remain under pressure due to FX demand and structural imbalances, although rising external reserves may provide some support,” the firm said.
Economists argue that long-term stability in the FX market will depend on sustained growth in non-oil exports, improved foreign portfolio inflows, increased diaspora remittances, and stronger investor confidence in Nigeria’s macroeconomic framework.
Implications for businesses and investors
The continued volatility in the FX market poses challenges for businesses, particularly manufacturers and importers who rely heavily on foreign inputs. Currency weakness raises input costs, fuels inflationary pressures, and complicates pricing decisions.
For investors, analysts advise caution, noting that FX risks remain a key consideration in portfolio allocation decisions.
However, some believe that ongoing reforms, combined with improving reserves and narrowing FX spreads, could gradually restore confidence if supported by consistent policy implementation.
Overall, the latest developments underscore the delicate state of Nigeria’s foreign exchange market, where progress toward stability remains incremental rather than assured.
