The hope for the Nigerian naira to rebound to its pre-2015 rates appears increasingly unlikely, according to a new report by the Economist Intelligence Unit (EIU).
The financial firm’s country report for Nigeria predicts a further devaluation of the naira to N1,068.3/$1 by 2025, attributing this projection to continued currency losses stemming from the large size of the parallel market and the country’s low foreign exchange reserves.
The EIU report highlights a widening gap between official and parallel-market exchange rates, leading to an anticipated attempt at exchange-rate convergence in 2025. The forecasted devaluation is considered a larger correction, resulting in an adjusted average exchange-rate forecast of N1,068.3:US$1, compared to the previous projection of N914.4:US$1.
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The report suggests that a larger devaluation may have limited pass-through, given the size of the parallel market.
“We have revised our exchange-rate forecast to front-load a larger devaluation in 2025, to reflect a widening gap between the official and parallel-market exchange rates. We expect another attempt at exchange-rate convergence that year, meaning a larger correction.
“We have adjusted our average exchange-rate forecast for that year to N1,068.3:US$1, from N914.4:US$1 previously. As our forecast for continued currency losses over time has not changed, the projected rate is also now weaker for later years.
“A larger devaluation will have limited pass-through, given the size of the parallel market, but our forecast for average inflation in 2025 has been revised up by two percentage points, from 15.1% to 17.1%,” the EIU said.
Nigeria has been grappling with the poor performance of the naira in the forex market for long, with the government’s efforts to stabilize the currency yielding little or no result. This backdrop has resulted in soaring cost of living, with inflation rising to 26.72 percent in September.
Recently, efforts by the government to boost FX liquidity in the country saw the naira rise above the N1,000/$1 threshold – selling as high as N920/$1 in the parallel market.
The development stoked hope of the naira’s rebound, riding on the wave of the government’s plan to secure a $10 billion loan that will be used to clear the backlog of its FX obligations.
However, the loan has not materialized and the naira is falling back to its previous rate of around N1250/$1. On Friday, the exchange rates stood at N1,099.986/$1 in the parallel market and N996.75 in the official market.
Though some financial institutions admitted that the Central Bank of Nigeria (CBN) has begun to clear outstanding matured FX forwards, the backdrop of the naira’s free-falling remains.
The EIU attributes the situation to insufficient liquidity, with a wide spread between official and parallel-market exchange rates reflecting the CBN’s reluctance to allow free access to hard currency.
The EIU said: “After brief consolidation in June, a wide (35%) spread between the official and parallel-market exchange rates has re-emerged, reflecting an ongoing reluctance by the Central Bank of Nigeria (CBN) to allow free access to hard currency, and resulting illiquidity in the Nigerian Foreign Exchange Market (NFEM, the official window).
“Pressing harder on currency reform would therefore mean a hefty devaluation, crushing any pretence of petrol price deregulation (assuming that higher pump prices are a political red line) and stretching a fragile fiscal position.”
The country report indicated that the formal market will face challenges in meeting increased demand due to the recent removal of import restrictions on 43 commodities. Furthermore, it highlighted a lack of commitment from the authorities in implementing conventional monetary policies to tackle issues affecting the naira, such as significantly negative short-term real interest rates.
The EIU notes that a potential currency float may face challenges, as the CBN lacks the firepower to adequately supply the market or clear a backlog of foreign exchange orders. The EIU predicts sizable devaluations in 2025 or possibly sooner, resulting in a 38.5% loss against the US dollar over the year.
The EIU further notes that the lack of commitment to a market-led naira, coupled with high inflation and continued spread with the parallel market, will leave the exchange-rate regime unstable, leading to periodic devaluations.
The projected rate at the end of 2028 is N1,262.1:US$1, with a continuous spread expected with the parallel market.
We live in denial, and we have a way of explaining away our failings and bad judgments.
We had a chance in February 2023 to try something different, something a bit unconventional to our wanton wastefulness and complete disregard for decorum and rules. But some Nigerians rather became cynical, they suddenly saw it as a battle to get their own person in power, so we ended up so divided to point of backing the very gang we knew in our hearts that they were not bringing anything different from what Buhari and his gang were serving us.
What we wanted in 2023 was not a magician, but someone who could make you believe in Nigeria once again and forget about exchange rate. Some have never tasted pure things in their entire existence, so they struggle to see and discern good intentions, straight from the heart, of a real human; a human who makes effort to connect to ordinary people’s dreams and yearnings.
Whatever becomes of the naira and the entire economy at large, you will still see all manners of counter argument, telling you why it couldn’t have been any other way. Why? Because a sizeable portion of our compatriots are not just dishonest, but also very cynical in their level of depravity and delusion.
The road is very long.