It seems the efforts of the Federal government and the Central Bank of Nigeria (CBN) to strengthen the Naira might not yield the desired result after all if the latest report from the Economist Intelligence Unit (EIU) is anything to go by.
EIU, in its new country report for Nigeria, has predicted that Nigeria’s official exchange rate is projected to weaken to N1,068.3/$1 by 2025.
The report also noted that there would be continued currency losses due to the large size of the parallel market and the low foreign exchange reserve of the country.
“We have revised our exchange-rate forecast to front-load a larger devaluation in 2025, to reflect a widening gap between the official and parallel-market exchange rates. We expect another attempt at exchange-rate convergence that year, meaning a larger correction.
“We have adjusted our average exchange-rate forecast for that year to N1,068.3:US$1, from N914.4:US$1 previously. As our forecast for continued currency losses over time has not changed, the projected rate is weaker for later years.
“A larger devaluation will have limited pass-through, given the size of the parallel market, but our forecast for average inflation in 2025 has been revised up by two percentage points, from 15.1% to 17.1%”, the report said.
Continuing, EIU bemoaned Nigeria’s forex illiquidity, noting that “after brief consolidation in June, a wide (35%) spread between the official and parallel-market exchange rates has re-emerged, reflecting an ongoing reluctance by the Central Bank of Nigeria (CBN) to allow free access to hard currency, and resulting illiquidity in the Nigerian Autonomous Foreign Exchange Market (NAFEM, the official window).
“Pressing harder on currency reform would therefore mean a hefty devaluation, crushing any pretence of petrol price deregulation (assuming that higher pump prices are a political red line) and stretching a fragile fiscal position.”
The country report also stated that additional demand in the formal market will be met with constrained supply due to the recent decision to eliminate import limitations on 43 imported commodities.
It went on to say that the authorities haven’t shown enough willingness to implement an orthodox monetary policy to address the issues weighing on the naira, such as severely negative short-term real interest rates.
According to the EIU, Nigeria’s attempt at currency float may not succeed over 2024-28, as the CBN “lacks the firepower to adequately supply the market or clear a backlog of foreign exchange orders, valued at over US$6bn, which will keep foreign investors unnerved.”
It added that the CBN will continue to prop up the official exchange rate in the short to medium term through access restrictions, implying long lead times at the NAFEM.
It noted that about one-third of the official foreign reserves of about $33 billion are tied up in derivative contracts or loans.
The EIU stated: “Sizable devaluations are expected in 2025—or possibly sooner—causing a 38.5% loss against the US dollar over the year, to N1,142.5:US$1 at end-December.
However, we do not expect lasting commitment to a market-led naira, as theCBN lacks experience of conducting monetary policy under a float.
“High inflation and a continued spread with the parallel market will leave the exchange-rate regime unstable and result in periodic devaluations. We project a rate of N1,262.1:US$1 at end-2028, with a continuous spread with the parallel market expected.”