Citi predicts reforms could shield Naira from oil price decline

Nigeria’s naira faces continued pressure from falling oil prices, though structural reforms may help it withstand the downturn better than in the past, according to David Cowan, Citigroup Inc.’s chief Africa economist.

The naira hit a record low of 1,667 per dollar last week, before recovering to 1,542 per dollar by Monday. Its decline has been driven by reduced foreign capital inflows and softer oil prices.

Global crude prices plunged almost 17% last quarter, now trading lower year-to-date at $71.05 as of 8:35 a.m. in London. Citi projects oil prices will drop further to $65 a barrel by the first quarter of next year.

“Although there are still a large number of issues to be resolved, we see a clear story that the structural changes start to play out across the economy,” Cowan said in a note to clients.

Nigeria “should be able to ride out a downturn in the oil price better than historically may have been the case,” provided the Central Bank of Nigeria allows flexible currency adjustments, said Cowan.

Nigeria, Africa’s largest oil producer, relies heavily on crude exports for foreign currency, but spends significant amounts on importing refined petroleum. Fuel subsidies alone cost the government $10 billion in 2022.

This situation is changing, with the launch of billionaire Aliko Dangote’s refinery near Lagos, which recently began producing gasoline. Nigeria is set to start selling crude to the refinery in naira on Tuesday, a move expected to ease foreign-exchange strains.

“The key question facing many investors,” Cowan said, “is whether the CBN will have to allow the naira to weaken further if the oil price falls as forecast.”

Historically, oil price declines led the central bank to restrict naira depreciation, resulting in foreign-exchange shortages. However, under new Governor Olayemi Cardossa, the bank may maintain a “willing seller-willing buyer” approach, despite political pressure to prevent further weakening, said Cowan.

Inflation’s trajectory will also influence the naira’s performance. Cowan expects inflation to decline steadily in 2025, which could ease demand for foreign currency and support the naira. This, however, depends on whether the central bank delivers gradual rate cuts while balancing currency stability with inflation control.

“If the oil price does fall back to the levels currently forecast by Citi Research in 2025, the naira will have to weaken out further from current levels,” said Cowan.

“But we are also confident that this weakness can be contained given the scale of recent moves, if oil production can be increased and greater confidence in the naira be maintained by the CBN not only running a tighter monetary policy, but one with positive real interest rates,” he said.

Citi forecasts the naira to weaken to 1,800 per dollar next year.