Analysts and other stakeholders in the Nigerian economy have described the proposed naira-US dollar exchange rate of N435.57 in the 2023 budget as unrealistic, given the challenge of low foreign exchange inflows and sustained rise in the dollar index.
They said based on the current parallel market rate of the naira to the US dollar which fell to N720 per dollar recently on dollar scarcity, the realisation of the proposed 2023 exchange rate is not supported by market fundamentals.
“The projection for N435.57/$ exchange rate in the 2023 budget is unobtainable as a result of the unending problem of dollar inflows, expectation of a sustained rise in the dollar index, and burgeoning importation due to declining local productivity,” Ayodeji Ajilore, an investment research analyst at ARM Securities, said.
He added that Nigeria should attract more dollars in the medium to long term, improve its business environment and reduce infrastructure deficit by pursuing market-oriented economic policies.
Zainab Ahmed, minister of finance, budget, and national planning, recently appeared before the House of Representatives committee on finance to defend the 2023-2025 Medium Term Expenditure Framework and Fiscal Strategy Paper.
She said the projection of N435.57/$ in the 2023 budget was anchored on a crude oil price of $70 per barrel, daily production of 1.69 million barrels as well as a real GDP growth rate of 3.7 percent.
“Nigeria reserves are not rising and there are backlogs in the market that the central bank has to clear and there are no inflows from foreign investors as in previous years,” Tajudeen Ibrahim, director of research and strategy at ChapelHill Denham, said.
The naira is likely to appreciate at the parallel market towards N670/$-N680/$ in October 2022, according to Bismarck Rewane, managing director/chief executive officer of Financial Derivatives Company Limited (FDC).
“A major step towards resolving the crisis is for the CBN to adopt a flexible exchange rate policy regime. It should be clarified that this is not a call for further devaluation. Rather it is a pricing mechanism that reflects the demand and supply fundamentals in the foreign exchange market which allow for rate adjustments as and when necessary,” Musa Yusuf, CEO of Centre for Promotion of Private Enterprise, said in a note.
Yusuf said: “It is a model that is predictable, transparent and sustainable and a policy regime that would reduce uncertainty and inspire the confidence of investors. It is a policy framework that would minimise discretion and arbitrage in the foreign exchange allocation mechanism.”
According to Cowry Asset Management, the key assumptions of the proposed 2023 budget raise the flag that more naira devaluations will be made a reality as the federal government hopes for an exchange rate of N435.57/$1 as against 2022 (revised) projections of N410.15/$1.
“The above is predicated on the upward-pressure swings in prices which are heavily driven by the current and lag effect of the global price surge due to the Russia-Ukraine war, domestic insecurity, rising costs of imports, exchange rate depreciation as well as other supply-side constraints,” the report said.
Rewane’s FDC, in its economic bulletin for September, said the naira had depreciated by over 20 percent year-to-date.
“The depreciation of the naira implies that the price of imported food items, such as wheat, will surge in Nigeria as empirical findings show that the exchange rate has contributed over 70 percent of the inflationary pressure in 2022,” FDC said.
It added that the exchange rate of the naira to the dollar depreciated by 2.5 percent to N704/$ on August 31 from N687/$ at the beginning of that month.
BusinessDay analysis of the average official exchange rate showed an increase from N415.1/$ in July to N427.83/$ in September 2022.
The naira touched a new low in both the official and parallel markets on September 26, 2022 as the currency crashed to N722 per dollar in the more-accessible parallel market, while it slumped to N436 per dollar in the official market.
Fitch in its ‘Sub-Saharan Africa Monthly Outlook: Currency Roundup, Broad Depreciatory Trend with Few Outliers’ report, predicted a mixed fortune for the naira in 2022. According to the global rating agency, the first half of this year would see the naira experiencing relative stability while it would become weaker in the second half.
It said: “The naira remained stable over H1, 2022, at an average of N416.83/USD, as the Central Bank of Nigeria (CBN) continued to intervene in the exchange rate. However, low capital inflows and weak oil receipts despite high crude prices have increased pressure on foreign reserves.
“As a result, the currency started to weaken in June, by 1.2 percent, and we believe that the CBN will allow the naira to depreciate slightly over H2, 2022, to N430.00/USD by end-2022.”