Nigeria's foreign exchange market witnessed a significant decline in dollar inflows last week, dropping to $672.30 million despite the naira showing strength across both official and unofficial trading windows.
Sharp Decline in Foreign Exchange Supply
Recent data from Coronation Research reveals that total inflows through the Nigerian Foreign Exchange Market (NFEM) fell substantially to $672.30 million from the previous week's $899.20 million. This represents a notable decrease of approximately 25% in dollar supply entering the formal market.
Despite the overall downturn, foreign portfolio investors (FPIs) maintained their position as the dominant source of dollar supply, contributing 34.42% of total inflows, equivalent to roughly $231.40 million. Other significant contributors included non-bank corporates at 25.70%, exporters at 22.47%, individuals at 7.56%, while the Central Bank of Nigeria supplied 5.52% of the market's dollars.
Naira Strength Amidst Declining Inflows
In a seemingly contradictory development, the naira appreciated in both the official and parallel markets during the same period. At the Nigerian Autonomous Foreign Exchange Market (NAFEM), the currency strengthened by 0.41%, closing at N1,442.43/$1 compared to N1,436.58/$1 the previous week.
The parallel market rate also showed improvement, firming by approximately 1.5% to N1,450/$1. This movement compressed the spread between official and unofficial rates to just 0.52% from nearly 2% previously, indicating a rare convergence between the two markets.
Analyst Warnings and Market Risks
Financial analysts have expressed caution about the sustainability of these gains. While market convergence typically signals improving confidence, experts suggest the current alignment may reflect short-term sentiment rather than deeper structural progress in Nigeria's foreign exchange framework.
Persistent speculative behavior and the naira's continued sensitivity to fluctuations in dollar supply remain significant risk factors. The narrowed spread places additional pressure on the Central Bank of Nigeria, which has been actively working to reduce arbitrage opportunities and discourage dollar hoarding through strategic interventions.
Coronation Research projects the naira will likely remain below N1,500/$1 in the near term, supported by ongoing liquidity measures and policy support. However, the currency could face renewed pressure if dollar inflows continue to weaken.
Reserves and Economic Indicators
Nigeria's external reserves provided some positive news, increasing by 0.4% to reach $43.5 billion. This modest growth is attributed to recent foreign portfolio inflows into fixed-income assets, a trend that analysts believe may continue despite potential rate adjustments at the upcoming Monetary Policy Committee meeting.
FBNQuest Merchant Bank supports this outlook, noting that attractive interest-rate differentials could keep foreign portfolio investors engaged in Nigerian markets in the short term. However, the sustainability of these inflows depends heavily on broader macroeconomic indicators including inflation trends, fiscal policy clarity, and global investor sentiment.
Recent inflation data showed Nigeria's annual rate easing sharply to 16.05% in October from 18.02% in September, though month-to-month price increases accelerated to 0.93% from 0.72%.
For the coming week, market analysts expect the naira to trade within a similar range, with stability heavily dependent on sustained Central Bank support and effective measures to curb speculative pressures. Any significant surge in demand from importers or opportunistic market participants could quickly widen the market gap again, exposing the currency to renewed volatility.
