Adedapo Adesanya
By Adedapo Adesanya
The Economic Intelligence Unit (EIU) has predicted that the Central Bank of Nigeria (CBN) will revert to heavier management of the exchange rate in late 2023 to tame rapid price rises, as evidence shows that the rates are widening across several windows after a float of the currency in June.
Business Post reported that the Naira closed at N775.76/$1 at the Investors and Exporters (I&E) window last Friday, while it sold at an average of N867 to a Dollar at the parallel market.
The EIU, which is an arm of London-based The Economist Magazine, stated in its Country Report on Nigeria, released over the weekend, that the wide gap between the I&E window and the parallel market before the FX unification is making a return due to illiquidity.
According to the EIU, “The new exchange rate is classed by the CBN as a ‘managed float’, but there are inconsistencies in application to a more liberal currency regime as foreign-exchange access restrictions still apply to an array of imports. This will unnerve foreign investors, and a backlog of FX orders the CBN failed to clear before opening up the market, and deeply negative real interest rates will keep liquidity tight.
“Along with high and rising inflation, the naira will be under significant pressure in the near term. The CBN lacks experience in conducting monetary policy under a float, and the need to control rapidly increasing inflation will become more acute over time.
“Our forecast is finely balanced, but we expect a return to heavier exchange-rate management from the second half of 2023 as the naira slides beyond N800:US$1, from N770:US$1 in early July.
“The CBN (according to official data) has the wherewithal to increase market intervention; 98 per cent of foreign reserves are liquid, and import cover is projected at 6 to 8 months in 2023. Based on this, we expect the currency to depreciate at a slower rate than fundamentals would imply over the medium to long run, given structurally high inflation.
“The average rate is forecast at N815:US$1 in 2024, sliding to N1,018:US$1 by end-2027, with a spread of 10-15 per cent against the black-market over the period.”
It also noted that rapid increases in inflation were expected from June 2023 as the price effects of market reforms transmit immediately into the system, even as it anticipated that the Monetary Policy Committee (MPC) would ramp up a monetary tightening cycle that began in early 2022, starting with the next meeting in late July.
“Interest-rate rises totalling 500 basis points are expected before end-2023, meaning 1,300 basis points will have been added since the cycle began and a peak rate of 23.5% – the highest level since 1993. However, this forecast is caveated with risks; the MPC attaches a large weight to economic growth in its decision-making formula, Mr Tinubu is opposed to high-interest rates, and the CBN’s independence is questionable.
“The small size of the financial sector (the private-sector credit/GDP ratio is just 22%) blunts the effectiveness of interest rates in countering inflation. We forecast that the CBN will maintain a tight stance until 2025, by which point disinflation and sustained monetary easing in advanced markets will justify aggressive interest-rate cuts to 14 per cent by 2026.
“Inflation will at all times be above the nine per cent target ceiling, but the CBN is expected to prioritise stimulus over its price stability mandate,” it added.
The EIU also forecast that Nigeria’s real Gross Domestic Product (GDP) growth will slow to 2.3 per cent in 2023 and 2.5 per cent in 2024, dragged down by rapidly rising inflation and a newly intensified phase of monetary tightening.
“Consumers and businesses will fail to adapt, causing domestic demand to contract for a second and third year running in 2023 and 2024, respectively. In a country with 2.5 per cent population growth, this marks an unusually long stretch of decline.
“Headline growth will be kept positive by net exports. Oil export volumes are expected to increase as security in the Niger Delta improves, complemented by the replacement of fuel and chemical imports in 2024 as a new refinery ramp up production,” it added.
In terms of the external sector, it noted that devaluation of the naira would support a widening of the current-account surplus in 2023 to 2.6 per cent of GDP, as import demand was compressed.
It added that without adequate FX supply and the Naira depreciating, petrol prices without subsidy could only go higher, adding that the impending protest and strike by organised labour may further worsen an already dire situation.
