Here’re three threats to naira stability

Naira stability faces some challenges stemming from large fiscal deficits, a mounting debt burden, and persistently high inflation rates, which together threaten to undermine the potential gains of ongoing foreign exchange reforms.

This was highlighted on Tuesday by Ugodre Obi-Chukwu, founder and CEO of Nairametrics, during the Finance Correspondents Association of Nigeria (FICAN)’s 2025 economic outlook event.

“Nigeria’s large fiscal deficits, growing debt burden and high inflation rate, posse more threats to exchange rate stability and could rubbish the benefits of ongoing forex reforms,” he said.

Obi-Chukwu noted that the disparity between the actual value of the naira and its current exchange rate can only be addressed through an adequate and sustained supply of foreign exchange. He pointed out that this approach must consider the strengthening of the dollar and increased competition for dollar inflows among frontier markets. Highlighting potential scenarios, he advised businesses to hedge against a worst-case scenario where the naira could fall to N2,200 to the dollar while being prepared to take advantage of a best-case scenario of N1,700 to the dollar.

In his analysis of headwinds facing the naira, Obi-Chukwu explained that the demand for foreign exchange has yet to recover fully as Nigerians continue to adjust to the impacts of the massive devaluation experienced in recent years. He admitted that the country’s large fiscal deficit remains a key driver of exchange rate depreciation, which is expected to persist in the near term.

High borrowing costs, he warned, pose a significant risk as debt repayment deadlines loom. Nigeria’s continued reliance on crude oil exports also adds vulnerability to the currency’s stability, as a drop in global crude oil prices could erase any recent gains. Additionally, the country’s heavy dependence on imports to meet domestic consumption needs places further strain on exchange rate stability.

On a more positive note, Obi-Chukwu identified potential tailwinds that could bolster the naira. He expressed optimism that anticipated interest rate cuts in the United States could improve capital inflows into Nigeria. Higher local interest rates, he noted, present an opportunity to attract investments in fixed-income and equity securities, which could further support capital flows. He also highlighted the removal of Nigeria from the Financial Action Task Force (FATF) Grey List, stating that this development is likely to enhance foreign exchange remittances and inflows. Other positive indicators include the Central Bank of Nigeria (CBN)’s introduction of the Enhanced Foreign Exchange Management System (EFEMS), which is expected to increase transparency, credibility, and price discovery in forex transactions. Furthermore, ongoing oil sector reforms are anticipated to unlock capital inflows, particularly in the upstream sector.

According to Obi-Chukwu, recent developments have shown some progress in forex stability, particularly over the last three months. Despite continued depreciation in the parallel market, he noted that the CBN’s forex reforms have boosted investor confidence. The CBN’s interventions in the retail segment of the forex market have also contributed to price stability, while continuous inflows from International Money Transfer Operators (IMTOs) are expected to enhance liquidity in the market.

Turning to inflation, Obi-Chukwu revealed that as of December 2024, Nigeria’s inflation rate stood at 34.80 percent, marking a 0.20 percent increase from the previous month. In response to this high inflation environment, he advised businesses to prioritise spending on critical costs now, arguing that delaying such expenditures could prove more costly in the long run. He also observed that higher interest rates present opportunities for local currency investments in government securities, which currently offer returns exceeding 25 percent. He further said that global efforts to curb inflation through interest rate cuts could make frontier markets like Nigeria more attractive for portfolio inflows. However, he expressed concern that some government actions aimed at curbing inflation are inadvertently fueling it further.

Obi-Chukwu also shared insights into Nigeria’s fiscal challenges, noting that the country’s total public debt had reached N135.8 trillion as of the end of 2024, reflecting a year-on-year increase of 39 percent. He predicted that the government would borrow approximately N12 trillion in 2025, even though the proposed budget suggests borrowing of N8 trillion. He explained that the government is likely to rely more on taxation to address the widening fiscal deficit. While the new tax bill is expected to face some resistance, Obi-Chukwu believes it will ultimately be passed. He said that maintaining high oil prices and achieving production targets are crucial to stabilising the exchange rate.

Addressing concerns over Nigeria’s debt burden, Obi-Chukwu warned that widening fiscal deficits and rising debt service obligations pose a significant threat to the country’s economic stability. However, he expressed hope that the government’s focus on capital expenditure could yield positive results, given the urgent need to ramp up infrastructure projects across the country. He said that the success of these efforts will be critical to supporting the naira and ensuring broader economic stability in the years ahead.