A leading provider of global business analytics and market insights, the Economist Intelligence Unit (EIU) has forecasted that the federal government will revert to a system in which it has greater influence over the exchange rate. High and increasing inflation is anticipated to keep putting pressure on the naira for the foreseeable future, according to the organisation. By 2027, the naira might be trading for about N1,018 to the dollar. The EIU’s most recent report on the naira revealed that the measure would be implemented to prevent further currency depreciation. It noted that Nigeria’s monetary authority, the Central Bank of Nigeria (CBN), has little experience with floating exchange rates.
Prior to the decision made by President Bola Ahmed Tinubu to modify the system, Nigeria had achieved a certain level of success in managing the value of the naira and the influence that it had on the economy. According to the EIU, the CBN lacks the expertise to manage fast-escalating inflation would become more pressing over time. Their prediction is relatively accurate, but they anticipate a return to more stringent exchange-rate control beginning in the second half of 2023 as the naira drops past N800:$1 from N770:$1 at the beginning of July.
Nigeria foreign reserves are still quite liquid.
According to the research organisation, there is a severe scarcity of foreign currency in the country at the moment, especially when it comes to meeting the need for FX through Form A and M. With 98 percent of its foreign reserves held in cash, the CBN may feel pressured to “intervene” in the market if speculators continue to take advantage of the situation. However, the EIU pointed out that Nigeria’s foreign reserves are still quite liquid, providing enough money to cover imports for another six to eight months. According to some experts, this provides the government ample time to shore up its revenue, fix its financial leaks, and reduce its debt load.
More so, the report also predicted that the naira would depreciate more slowly than expected over the medium to long term due to the effects of the fluctuating exchange rate on people’s daily lives. The average rate is predicted to fall to N1,018 to US$1 by the end of 2027 from “N815 to US$1 in 2024”. Compared to the black market rate, this is a discount of roughly 10-15%. Meanwhile, a shortage of dollars led to a 0.93 percent depreciation of the Naira on Friday at the Investors’ and Exporters’ (I&E) forex window, Nigeria’s official FX market. Data from the FMDQ showed that by the close of business on Friday, the dollar was traded at N775.76, up from N768.60 on Thursday at the I&E window.
Naira value rose by N3, resulting in a dollar price of N867 on Friday.
The foreign exchange market saw a dip in turnover of 38.89 percent on Friday, from $88.66 million on Thursday to $54.18 million. Stronger than Thursday’s N869/$1 bid and Wednesday’s N845/$1 bid, N799.50/$1 was sustained by willing buyers and sellers. N730.00 was the high bid on Thursday and Wednesday in the I&E window; however, the market auction saw lower bids of N465.00. On the parallel market, the value of the naira rose by N3, resulting in a dollar price of N867 at market closure on Friday, down from N870 in the morning. Compared to the N867 exchanged since the start of the week, this was an increase of 0.34 percent.
After a period of instability in the FX market, the Central Bank of Nigeria (CBN) consolidated all parts of the FX market into the I&E window on June 14, 2024, making interested buyers and sellers available again. As a result, the N463.38/$ official exchange rate increased to the current N775.86 rate. Despite the partial convergence of the official and black market currency rates, its shortages are expected to continue for the time being. EIU analysts predict that the Central Bank of Nigeria will resume stricter supervision of the currency rate in late 2023 in an effort to curb inflation.
CBN has labelled the new exchange rate as a “managed float”.
Moreover, the EIU analysis further revealed that the most significant devaluation of the naira in history and a rapid narrowing of the previously 60% difference with the black-market rate to roughly 3% occurred after the CBN harmonised Nigeria’s several exchange rates in June. The CBN has labelled the new exchange rate as a “managed float,” although despite the more relaxed nature of the currency system, there are still limits on the use of foreign exchange for a wide variety of imports. This will cause concern among foreign investors, and the CBN failure to clear a backlog of foreign currency orders before opening the market, along with severely negative real interest rates, will keep liquidity tight.