In a recent report, the Economist Intelligence Unit (EIU) has warned that the pressure on Nigeria’s national currency, the naira, is expected to persist in the near term, potentially leading to a depreciation as low as N1,018 per dollar by 2027. The primary drivers of this anticipated decline include high and rising inflation rates that continue to plague the nation’s economy.
According to the EIU’s forecast, the average exchange rate for 2024 is expected to be around N815 to US$1. However, this rate is projected to deteriorate, reaching N1,018 to US$1 by the end of 2027. Over this period, the report indicates a spread of 10-15 percent against the black-market exchange rate.
The report attributes the impending pressure on the naira to persistent high inflation rates and other economic challenges faced by Nigeria. In recent times, the naira has experienced fluctuations in value, further exacerbating the situation.
On Friday, the 28th of July, the naira witnessed a depreciation of 0.93 percent at the Investors’ and Exporters’ (I&E) forex window, which is Nigeria’s official foreign exchange market. This decline was attributed to a shortage of dollars, resulting in the dollar being quoted at N775.76, compared to N768.60 the previous day.
The FX market also experienced a decline in turnover, falling by 38.89 percent to $54.18 million on Friday from $88.66 million on Thursday. Willing buyers and sellers maintained bids as high as N799.50 per dollar, showing a stronger position than previous trading days.
The parallel market saw the naira strengthen by N3 as the dollar closed at N867 on Friday, showing a 0.34 percent gain compared to the rate at the beginning of the week.
The Central Bank of Nigeria (CBN) implemented a major reform on June 14, 2023, when it collapsed all segments of the FX market into the I&E window, thereby unifying multiple exchange rates. This move led to the sharpest devaluation of the naira in history and significantly narrowed the spread with the black-market rate to about 3 percent. However, foreign-exchange scarcity continues to persist despite these efforts.
The EIU report expressed concerns about inconsistencies in the application of a more liberal currency regime, as foreign-exchange access restrictions still apply to an array of imports. Additionally, the report highlighted that the CBN might resort to a heavier management of the exchange rate in late 2023 to control rapid price rises.
Foreign investors are likely to be unnerved by the ongoing foreign-exchange scarcity and the backlog of foreign-exchange orders that the CBN has yet to clear since opening up the market. Furthermore, deeply negative real interest rates are expected to keep liquidity tight, posing additional challenges for the Nigerian economy.
The EIU’s prediction of a continued decline in the naira’s value underscores the urgency for Nigeria’s authorities to address underlying economic issues and implement effective measures to stabilize the currency and foster a more sustainable economic environment.
The Nigerian government and the Central Bank must take proactive steps to combat inflation, which has been a persistent problem in the country. High inflation erodes the purchasing power of the naira, leading to an increase in the cost of goods and services for consumers and businesses alike. Moreover, a depreciating currency can lead to capital flight, as investors seek more stable assets elsewhere.
To mitigate the pressure on the naira, the government can focus on fiscal discipline, reducing excessive borrowing, and implementing structural reforms to promote economic growth and diversification. Prioritizing investments in infrastructure, agriculture, and technology can help stimulate economic activity and create job opportunities, thereby reducing reliance on oil exports and enhancing the nation’s resilience to external shocks.
Additionally, the Central Bank may consider measures to attract foreign investment and boost foreign reserves. This could involve increasing interest rates to attract foreign capital, implementing policies to encourage non-oil exports, and providing incentives for foreign investors to invest in Nigeria.
The CBN’s role in managing the exchange rate should strike a balance between stability and market flexibility. While a managed float approach can be useful in the short term, it is essential to avoid prolonged interventions that might distort market forces. A transparent and consistent exchange rate policy will foster investor confidence and attract much-needed foreign direct investment.
Moreover, the CBN can collaborate with other regulatory bodies to create an enabling environment for businesses to thrive. Reducing bureaucracy, improving ease of doing business, and enhancing investor protection will make Nigeria a more attractive destination for foreign investors.