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This warning comes as the CBN returned to a supportive
monetary system after its uneventful adventure with the “managed float” system
caused the naira a more than 60 percent loss in exchange value on the street
market since June.
In its country report for Nigeria, published early this
month, the research firm, which had in August warned that the country’s apex
bank doesn’t have the sufficient experience to successfully manage a managed
floating FX system whose objective was to create an FX convergence situation,
said that without support for the naira, the currency will be under pressure,
forcing it to continue its downward fall.
A situation that has seen the currency fall to record lows
on both the street market and the official market.
EIU said, “an unsupportive monetary policy implies that the
naira will remain under pressure, and the CBN lacks the firepower to adequately
supply the market or clear a backlog of foreign exchange orders valued at over
US$6 billion, which will keep foreign investors unnerved.”
Apparently, one of the most important instruments used to
defend a currency is the strength of its foreign reserve, of which,
unfortunately, a huge portion has been tied up in derivative contracts or
loans.
EIU said, “Official foreign reserves are reported at US$33
billion, but up to one-third of the assets are encumbered, tied up in
derivative contracts or loans. In the short to medium term, the official
exchange rate will continue to be propped up by access restrictions, implying
long lead times at the NFEM.”
It noted that unlike in June, when the apex bank was willing
to embark on some market-friendly policies especially aimed at convergence,
“the CBN would resist any other attempt at convergence until petrol imports are
eliminated in late 2024, with the naira ending that year at N822.9:US$1, down
from an estimated N810:US$1 at end-2023 (accounting for some likely near-term
weakening).”
“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 the CBN lacks experience 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 the end of 2028, with a
continuous spread with the parallel market expected,” it explained.
Regardless of the developments in the management of the
naira, the research firm believes that “Nigeria’s real GDP should pick up from
an estimate of just 2.2 percent in 2023 but remain sluggish in 2024, at 2.6
percent.”
However, domestic demand should be affected by a combination
of high inflation and monetary tightening, a situation that should cause
domestic demand to shrink in 2024.
EIU said, “Net exports will be the sole growth driver early
in the forecast period. We expect oil export volumes to increase as security in
the Niger Delta allows higher oil output; the balance will be complemented by
the displacement of fuel and chemical imports in 2024 as the Dangote refinery
ramps up production.”
The research firm believes that real domestic growth of 4
percent should happen in 2025, the highest rate since 2014, “owing partly to
rebound effects—and average 3.2% in 2026–28, with the PIA and recent
deregulation of the power sector expected to support investment over the medium
to long term.”