Naira slides to fresh weekly lows as dollar inflows decelerate despite swelling reserves

The naira depreciated across all foreign exchange segments this week as dollar liquidity dried up, confounding expectations that rising external reserves would buttress the currency. Analysts cite seasonal demand pressures and subdued portfolio inflows as headwinds for Nigeria's struggling currency.

The naira extended losses across the official and parallel markets this week despite the Central Bank of Nigeria's external reserves climbing to their highest level in months, signalling a widening disconnect between reserve accumulation and currency stability.

The domestic currency weakened to fresh lows at the official Investors and Exporters window, depreciating by 1.2 percent to close Friday at 1,689 naira per dollar. On the parallel market, the naira slumped to 1,710 per dollar, eroding gains made in the previous fortnight. The decline occurred even as CBN reserves surged past 40 billion dollars, buoyed by oil receipts and external loan disbursements.

Dealer banks reported a dramatic squeeze in dollar supply during the week. Morning dollar auction volumes fell below historical averages as both oil exporters and portfolio investors held back from selling greenbacks. Market participants attributed the liquidity crunch to the typical seasonal pattern following month-end dollar demands from importers and companies servicing foreign obligations. The CBN's twice-weekly dollar sales at the official window proved insufficient to absorb underlying demand, leaving the naira vulnerable to depreciation.

For Nigerian businesses, the naira weakness poses immediate challenges. Manufacturing firms importing raw materials face higher input costs, pressuring production and competitiveness. For instance, companies relying on dollar-denominated credit lines must service larger naira obligations as the currency weakens. Import-dependent sectors including pharmaceutical, textiles, and food processing already grappling with input shortages now confront steeper dollar conversion costs. Export-oriented businesses, while theoretically advantaged by a weaker naira, struggle to capitalize on currency tailwinds due to inadequate local financing and persistent infrastructure constraints.

For everyday Nigerians, the naira depreciation trickles down quickly to consumer prices. Food inflation, already stubbornly elevated at 35 percent year-on-year, reflects the cost of imported food items and fertilizer priced in dollars. Medicine prices rise as pharmaceutical imports surge in cost. School fees at institutions charging in dollars or dollar-linked fees become less affordable for middle-class households. The purchasing power erosion compounds existing hardship from elevated domestic interest rates and elevated fuel costs.

The paradox of rising reserves amid currency weakness underscores structural challenges in Nigeria's external sector. Reserve accumulation reflects improved oil prices and loan inflows rather than a sustained narrowing of the current account deficit. The CBN's policy of holding significant portions of reserves in foreign currency accounts abroad limits the immediate impact on domestic liquidity. Analyst consensus suggests the central bank remains reluctant to deploy reserves aggressively to defend the naira, preferring to husband them against future external shocks.

Looking ahead, naira stability depends critically on sustained dollar supply improvements. Oil price resilience near 90 dollars per barrel provides some support, but seasonal import cycles and subdued foreign direct investment inflows pose near-term headwinds. Market observers anticipate continued volatility until portfolio investors regain confidence in Nigerian assets. The CBN's next monetary policy committee meeting in November will be closely watched for signals on reserve deployment strategy and dollar management tactics. Without material improvement in dollar flows, the naira could test fresh lows in coming weeks despite reserve comfort.