The $2.25 billion World Bank loan given to Nigeria to stabilise the economy and scale up support to the poor and most economically at risk will boost dollar supply and prop up the ailing naira, analysts say.
Nigeria’s naira, which is down by around 70 percent since last year, depreciated further against the dollar on Friday even after the country announced it had secured approval for the loan.
Analysts however project a comeback this week, as the World Bank inflow provides the CBN with firepower to bolster the currency, which has been declining recently.
The government will however need to devise a more long-term strategy to unlock consistent dollar inflows to ensure stability of the currency and economy.
Data from FMDQ indicated that the local currency fell by 0.44 percent to N1,482.72/$ on Friday from N1,476.24/$ the previous day. The black market rate depreciated by 0.34 percent to N1,485/$ from N1,480/$ on Thursday.
Wale Edun, minister of finance and coordinating minister of the economy on Thursday announced the approval of two major financial support packages by the World Bank.
The funding will be received via two major development projects. The first project is the Nigeria Reforms for Economic Stabilization to Enable Transformation (RESET) Development Policy Financing, which is set to receive $1.5 billion.
The second project, NG Accelerating Resource Mobilization Reforms Programme-for-Results, has proposed funding of $750 million.
Segun Adams, a research analyst at Afrinvest said that the $2.25 billion loan, which attracts one percent interest, is a short term strategy that will improve liquidity position, “and if things are equal we expect the appreciation of the naira but there are other factors that are at play in the market.”
“Currently, the economy is facing a supply deficit of FX which is a piling pressure on the naira,” Adams said.
“To address naira volatility long-term, there’s a need to look at more structural kinds of strategies, like enhancing competitiveness to boost non oil exports and also developing local capacity such that we are sufficient in producing key products and won’t need to import critical inputs which drains FX,” he said.
The naira, which has been volatile since it was floated in June last year, is still in price discovery mode. It was devalued by over 190 percent to N1470/$ currently from N460/$ June last year.
Earlier this year, dollar inflows into Nigeria surged due to the CBN action to lure foreign portfolio investors with higher interest rates on government debt and an undervalued naira. The moves were complemented by clearing a protracted foreign exchange forwards backlog that had drained confidence in past reforms.
Cumulative foreign inflows rose to $2.1 billion between January and April compared to $1.6 billion in the whole of 2023.
The CBN’s published gross foreign exchange reserves ended the week at 0.34 percent (US$109.89 million) higher, closing at US$32.80 billion.
Analysts at Coronation Securities Limited expect the loan facility for Nigeria to provide a buffer to the foreign reserve position.
Olaolu Boboye, lead economist at CardinalStone Securities Limited, said securing the loan will strengthen confidence in the FX market.
Gbolahan Ologunro, a portfolio manager, said that the CBN does not have the discretion to use the fund as it pleases in the FX market but can supply it in tranches.
In May, turnover in the official market surged to a record $6.2 billion from $4.90 billion in April. So far in June there’s been a total turn over of $1.83 billion.
The loan operation is structured around four key results distributed across two pillars: increasing fiscal oil revenues from 1.8 per cent of Gross Domestic Product in 2022 to 2.7 per cent by 2025, boosting non-oil fiscal revenues from 5.3 per cent to 7.3 per cent over the same period, expanding social safety nets to assist 67 million vulnerable Nigerians, and raising the import value of previously banned products from $11.3m to $54.6m by 2025.
