The International Monetary Fund (IMF) has expressed serious concerns about Nigeria’s economic outlook in a recent report on post-financing assessment. According to the IMF, Nigeria could face an alarming inflation rate of up to 44% if the Central Bank of Nigeria (CBN) does not implement substantial tightening of its monetary policy. The naira’s value is expected to continue to decline rapidly due to significant economic pressures, exacerbated by the possibility of a climate-related disaster striking the country in early 2024. This report highlights a worrying chain of events that could significantly destabilize Nigeria’s economy.
Factors such as inadequate monetary policy, ongoing strain on the naira, and unfavourable weather conditions are all contributing to this precarious situation. According to the IMF, there is a potential for a devaluation of the naira in 2024, which would worsen inflationary trends. Additionally, it was pointed out that if inflation and depreciation were to spiral out of control, along with a climate shock, it could pose a threat to Nigeria’s ability to pay back the Fund. The analysis presented a pessimistic scenario to the officials, highlighting certain key aspects. In this scenario, monetary policy proves to be ineffective in reducing inflation to below 20%, and the naira continues to face persistent pressure.
Naira is expected to drop by 35 percent in 2024.
Nigeria faces additional unfavourable climate events in early 2024, compounding the existing agricultural challenges caused by severe flooding in late 2022, which resulted in decreased production and a significant increase in food costs within the country. With no local manufacturing and the recent opening up of commodity imports, the currency is expected to drop by 35% in 2024, leading to a significant increase in inflation, reaching 44%, until monetary policy is tightened. The IMF remains optimistic that Nigeria will repay its debt to the Fund as long as external debt service remains a top priority, despite the obstacles ahead.
Nevertheless, the pressing humanitarian issues such as increasing poverty and food insecurity are jeopardizing the ability to repay debts, leading to difficult decisions. The unpredictability of Nigeria’s foreign reserves and the possibility of more external shocks could further jeopardize the nation’s economic security and its people’s welfare. The value of the Nigerian Naira dropped sharply against the US Dollar in the official market, ending the week at a worrying ₦1,537.96/$1. This decrease is due to ongoing high demand affecting the currency’s worth, with a notable 74% decrease in forex turnover to just $84.10 million emphasizing the situation.
CBN has taken proactive measures to fight against inflation.
It was reported that the Naira is facing increased difficulties due to a drop in forex liquidity, causing both official and parallel market rates to decrease and raising concerns about Nigeria’s economic stability. In addition, the National Bureau of Statistics (NBS) recently announced a substantial inflation rise to 29.90% in January 2024, which is a notable increase from the previous month’s rate of 28.92%. The recent increase in the headline inflation rate by 0.98% from December 2023 highlights the ongoing inflationary challenges impacting the Nigerian economy.
In December 2023, Nigeria’s broad money supply reached a new high of ₦78.74 trillion, despite the Central Bank of Nigeria’s (CBN) attempts to stabilize the currency with different foreign exchange policies and stricter monetary measures. This significant 51% year-on-year increase from ₦52.16 trillion in 2022 indicates a growing concern for potential inflationary impacts, which could erode the purchasing power of Nigerians. In the fight against inflation, the CBN has taken proactive measures by steadily increasing the Monetary Policy Rate (MPR) from 11.5% in May 2022 to 18.75% by July 2023.
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Despite ongoing efforts, the inflation trend remains unchanged, presenting major obstacles for the economy. All focus is on the CBN’s upcoming Monetary Policy Committee (MPC) meeting in 2024, set for next week. The CBN Governor, Yemi Cardoso will be closely watched as he discusses the central bank’s position on interest rate increases and its plans to address growing inflation. The importance of this meeting cannot be overstated, as Governor Cardoso and President Bola Tinubu may have conflicting views on lowering interest rates in Nigeria. This clash of policies could create tension during a crucial time where unified economic strategies are essential.
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