Amidst rising prices, the Economic Intelligence Unit (EIU) forecasts that the Central Bank of Nigeria (CBN) could resume stern exchange rate regulations towards the end of 2023. After currency floats in June, data shows that rates are spreading out across a variety of time periods. The Naira reportedly sold for an average of N867 to the Dollar on the parallel market last Friday, while it closed at N775.76/$1 at the Investors and Exporters (I&E) window. According to the EIU, illiquidity has brought back the large disparity between the I&E window and the parallel market that existed before the FX unification.
The Economist Intelligence Unit (EIU), based in London and affiliated with The Economist Magazine, noted in its recently published Country Report on Nigeria that despite the CBN classification of the new exchange rate as a “managed float,” foreign-exchange access restrictions remain in place for a wide range of imports. As a result, foreign investors will feel less confident, and the liquidity will remain tight due to the CBN failure to clear a backlog of foreign exchange orders before opening the market and the extremely negative real interest rates.
CBN has the resources for greater market involvement.
High and increasing inflation will put huge strain on the naira in the near future. The need to slow fast rising inflation will only grow in importance, and the CBN lacks experience conducting monetary policy under a float. While the EIU estimate is purely balanced, the organization projected a return to stricter exchange-rate regulation in the second half of 2023 as the naira goes beyond N800/$1. CBN has the resources for greater market involvement, according to official data, with 98% of foreign reserves in liquid form and import coverage expected to be between 6 and 8 months in 2023.
Considering the inherently high inflation, the reports projected that the currency would fall at less rapid pace compared to what fundamentals would indicate over the medium to long term. By 2024, the average exchange rate is projected to be N815/ $1, rising to N1,018/$1 by the end of 2027 with a margin of 10-15% against the black market. Moreover, it forecasted that the Monetary Policy Committee (MPC) would accelerate a monetary tightening cycle that had begun in early 2022, commencing with the upcoming meeting in late July, even as the price effects of market reforms transmit immediately into the system.
GDP is expected to drop to 2.3% in 2023 and 2.5% in 2024.
By the end of 2023, interest rates are projected to have risen to a total 500 basis points, bringing the overall increase since the cycle began to 1,300 basis points and the peak rate to 23.5%, the highest level since 1993. However, this forecast is caveated with risks; the MPC places a substantial weight to economic growth in its decision-making formula, President Tinubu is hostile to high-interest rates, and the CBN independence is questionable. Due to the financial sector’s limited size (22% private sector credit/GDP ratio), interest rates are unable to effectively combat inflation.
It was also estimated that the CBN will keep rates low until 2025, when deflation and continued monetary easing in developed markets would warrant interest rate reduction as low as 14% by 2026. While inflation would remain persistently high (over the CBN 9% objective), the report anticipates CBN to put stimulus ahead of its mission to maintain price stability. In addition, the EIU predicts that the growth of Nigeria’s real GDP would drop to 2.3% in 2023 and 2.5% in 2024 due to rising inflation and a newly magnified period of monetary tightening.
Oil exports should rise as security improves in the Niger Delta.
Domestic demand will fall in 2023 and 2024 because of the inability of consumers and businesses to adapt. This is an exceptionally prolonged drop for a country expanding at a rate of 2.5% per year. Net exports will keep headline growth positive. As security improves in the Niger Delta, oil exports should rise, and in 2024, a new refinery’s increased output will eliminate the need to import fuel and chemicals. The report noted that the Naira’s depreciation and the inadequacies of foreign exchange supply meant that the price of unsubsidized petrol could only further rise. Also, the planned protest and strike by organized labour might exacerbate the dire situation, it added.