Nigeria experienced a significant boost in its net foreign exchange (forex) inflows in the second quarter of 2024, a positive development amid ongoing currency depreciation pressures. According to data from the Central Bank of Nigeria (CBN), net forex inflows rose by 49.39%, reaching $17.18 billion in Q2 2024, up from $11.50 billion in the first quarter. This rise is attributed to a combination of increased inflows and reduced outflows across both autonomous sources and official channels, underscoring a notable improvement in Nigeria’s forex dynamics.

Forex Inflow Breakdown

The CBN’s data highlights that total foreign exchange inflows through the Nigerian economy amounted to $24.55 billion in Q2 2024, an increase from the $22.26 billion recorded in Q1. This increase was primarily driven by autonomous sources, which accounted for a substantial share of the inflows. Key components of this growth include:

– Autonomous Channels: Inflows through autonomous channels rose from $14.17 billion in Q1 to $16.12 billion in Q2, representing a $1.95 billion increase. Autonomous sources, which encompass remittances, private capital inflows, and other private-sector transactions, remain a key driver of forex inflows in the country.
– CBN-Sourced Inflows: Foreign exchange inflows through the CBN also increased marginally, from $8.09 billion in Q1 to $8.43 billion in Q2. The slight uptick indicates the CBN’s ongoing efforts to stabilise the forex market through careful management of both inflows and outflows.

The resilience of private sector-driven inflows amidst Nigeria’s forex challenges illustrates increased forex liquidity provided by market-driven sources, despite the economic pressures the country faces.

Decline in Forex Outflows

Notably, forex outflows also declined sharply in Q2 2024, further contributing to the improvement in Nigeria’s net forex inflow position. Total outflows decreased by 31.51%, from $10.77 billion in Q1 to $7.37 billion in Q2. This reduction was largely due to:

– CBN-Sourced Outflows: Forex outflows from the CBN experienced a substantial drop of 36.06%, from $8.92 billion in Q1 to $5.71 billion in Q2. This indicates a tightening of forex management by the CBN, which may reflect a strategy to curtail capital flight and prioritise essential dollar allocations amidst persistent demand pressures.
– Autonomous Sources: Outflows from autonomous sources also saw a modest reduction, decreasing by 8.79%, from $1.82 billion in Q1 to $1.66 billion in Q2. This could reflect either a reduction in private sector demand for foreign currency or a more controlled approach to capital flow by the government.

The combined effect of increased inflows and reduced outflows has significantly improved Nigeria’s net forex inflow, which surged by 49.39% to reach $17.18 billion in Q2 2024, up from $11.50 billion in Q1. Autonomous sources were the primary contributors, recording a net inflow of $14.46 billion compared to $12.35 billion in the previous quarter. The CBN also reversed its net position from an outflow of $0.85 billion in Q1 to a net inflow of $2.72 billion in Q2.

Depreciation of the Naira Amidst Forex Gains

Despite the rise in net forex inflows, Nigeria’s exchange rate continues to face depreciation pressures. The average exchange rate at the Nigerian Foreign Exchange Market (NFEM) depreciated by 5.86%, falling from N1,304.72 per US dollar in Q1 to N1,385.96 per dollar in Q2. Since the end of Q2, the naira has weakened further, with the official exchange rate trending towards N1,650 per dollar, while the parallel market rate has reached approximately N1,750 per dollar.

Conclusion

Market analysts suggest that the ongoing depreciation results from increased demand pressures coupled with supply constraints, particularly in the retail forex market. Suppliers reportedly continue to set prices due to the tightening supply, causing a downward trend in the exchange rate even as net forex inflows rise.

Nigeria’s forex landscape saw marked improvements in Q2 2024, with a considerable increase in net forex inflows and a notable reduction in outflows. However, the pressures facing the naira in the forex market highlight ongoing challenges as the country grapples with currency depreciation and demand-supply imbalances. While the CBN’s proactive approach to forex management and the resilience of autonomous sources have bolstered inflows, sustaining currency stability may require more extensive policy measures to support supply, especially as demand for foreign currency remains high.