The Economist Intelligence Unit (EIU) has in its latest Country Report on Nigeria, predicted an end-2024 rate of N1,770/$ and N1,817/$ by the end of 2025.
The firm, however, expressed concern about the long-term value of the naira, with projections indicating a potential slide to N2,381/$ by 2028 and that the spread with the parallel market will be 5-15 per cent.
This, according to it, will be a reflection of the impact of a lax monetary-fiscal policy mix and fluctuating world oil prices.
It pointed out that the Central Bank of Nigeria (CBN) faces a significant liquidity crisis in supporting the naira, as nearly $20 billion of its $33 billion in foreign reserves is tied up in various derivative deals.
The report read: “For most of this year, the naira will be highly volatile, leading to regulatory erraticism that can affect businesses, especially those holding foreign currency.
“The CBN lacks the liquidity to support the naira itself; out of US$33bn in foreign reserves, a large share (estimated at nearly US$20bn), is committed to various derivative deals.”
The EIU also proposed foreign borrowing to rebuild the CBN’s reserves, clear backlogs of unmet foreign exchange orders, and restore confidence in the naira.
“Our view is that it will take foreign borrowing to rebuild the CBN’s buffers, fully clear a backlog of unmet foreign exchange orders and restore confidence. This is probably only achievable towards the end of 2024,” it added.
Nigeria recently secured a $3.3 billion loan from the African Export-Import (Afrexim) Bank and a $1 billion loan from the African Development Bank, with an additional $1.5 billion sought from the World Bank, while the CBN is working with the International Monetary Fund (IMF) to create a framework to address excess volatility in the forex market.
The EIU also forecast a gradual recovery of foreign reserves between 2024 and 2028, but with a cautious outlook on the naira’s valuation.
The report noted that despite an increase in the policy rate in February, the overarching economic goals set by President Bola Tinubu, including a notable aversion to high-interest rates and the ambition to double GDP by 2031, may hinder the necessary monetary tightening to attract foreign investors.
It said this is further worsened by high inflation rates, eroding the real value of short-term interest rates and potentially leading to higher unemployment if aggressive monetary policies are adopted.
“Deficit monetisation and high inflation will undermine the currency. A possibility is that monetary policy will be tightened to a point at which foreign investors view the naira more favourably.
“Although the CBN raised its policy rate in February, Mr Tinubu has expressed an aversion to high interest rates as his overarching economic goal is to double GDP by 2031. As inflation has been allowed to rise to a level at which a positive real short-term interest rate would create a significant rise in unemployment—adding another policy induced element to economic hardship—we assume that politics will prevent this from happening.
“The CBN’s independence has been heavily eroded in recent years; because fiscal firepower is so limited, the government will continue to rely on monetary policy to achieve job-creation and development objectives,” the report added.
The report further predicted a volatile year for the naira, with potential regulatory changes that could impact businesses, especially in the face of foreign currency holdings.
