As the Nigerian forex market continues to fluctuate, with the naira, the nation’s currency, falling deeply against the dollar, the Economic Intelligence Unit (EIU) has predicted that the government will return to its previous system – where the central bank had control pegs around the naira to curb its performance.
In its latest report about the naira, the EIU said the Central Bank of Nigeria (CBN) lacks the experience to handle a flexible exchange rate system, indicating that without control, the naira will continue on its free fall in the exchange market.
The EIU said it expects the naira to slide beyond N800/$1 in July, given the country’s rapid rate of inflation.
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“The CBN lacks experience in conducting monetary policy under a float, and the need to control rapidly increasing inflation will become more acute over time.
“Our forecast is finely balanced, but we expect a return to heavier exchange-rate management from the second half of 2023 as the naira slides beyond N800:US$1 from N770:US$1 in early July,” the research and analytical firm said.
The deregulation of the FX market came as part of President Bola Tinubu’s reforms, which has also seen the removal of fuel subsidies.
Before the deregulation, the CBN operated a system of controlled FX market, with the naira rate against the dollar officially pegged at around N464/$1 at Investor and Exporter (I&E) window. Although the controlled FX market system came with multiple exchange rates, the official rate of the naira was determined by the central bank.
However, the naira’s woeful performance in the FX market has been attributed to insufficient liquidity of foreign currencies – owing largely to the drop in oil revenue and FX generation from non-oil exports.
Even after the floating of the FX market, exchange rates are yet to reach convergence. The naira traded around N768.60/$1 at the I&E window and N870/$1 at the parallel market as of Friday.
The CBN acting governor, Fola Shonubi, admitted in a post-MPC meeting on Tuesday, “the reality that there is pent-up demand which current supply may not be sufficient for.”
The EIU said the shortage of foreign currency in the country is affecting the fulfillment of demands for foreign exchange through Form A and M. This scarcity, along with opportunistic behavior by speculators, could lead the CBN to increase its market interventions. Notably, approximately 98 percent of their foreign reserves are in cash, further highlighting the need for proactive measures to address the situation.
But the firm noted that Nigeria’s foreign reserves are still relatively liquid, which means they can pay for imports for at least another six to eight months. This has been doubted by many, given the country’s inability to fulfill its reparatory financial obligations.
Nigeria’s foreign reserves stood at $33.946 billion as of July, according to the CBN. But Africa’s largest economy has failed to repatriate more than $500 million in trapped funds belonging to members of the International Air Transport Association (IATA), raising suspicion that the foreign reserves may not be as much as the central bank claims.
Investors are concerned that Nigeria is struggling to pay off debts that it should be able to pay easily given the said volume of its foreign reserves.
According to the EIU’s projections, the naira is anticipated to experience a slower devaluation than initially predicted in the medium to long term due to the instability of the exchange rate and its impact on people’s lives. They estimate that the average exchange rate will be around “N815 to US$1 in 2024” and will further decline to “N1,018 to US$1 by the end of 2027”.