Inflation will continue to rise in early 2024 due to market reforms and persistent currency volatility on the black market, according to Bismarck Rewane, managing director/chief executive officer of Financial Derivatives Company Limited.
Nigeria’s inflation rate has accelerated 5.51 percentage points to 27.33 percent in October 2023 from 21.82 in January of the same year.
Rewane said base effects are expected to kick in by mid-year, with inflation moderating to an average of 23.6 per cent in 2024 from 24.4 per cent in 2023.
During an outlook session organised by Parthian Partners, Africa’s premier inter-dealer broker, he highlighted inflation stocking factors, including exchange rate pass-through, higher energy prices, and money supply growth.
On foreign exchange (FX), Rewane said the naira converged after the Central Bank of Nigeria (CBN) began FX market reforms.
He said the Nigerian Autonomous Foreign Exchange Market (NAFEM) and the parallel market gap thinned out to as low as N4.75 during the period.
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Reforms were not sustained as the forex controls were reintroduced primarily due to low forex supply. Naira has lost 35 per cent in the parallel market since the FX reforms in June, he said, adding that the NAFEM-Parallel gap has widened to N297.6.
The Nigerian forex market is characterized by weak exchange rate fundamentals, such that import of goods and services exceeds export earnings, terms of trade show weak international competitiveness, Diaspora remittance remains a veritable source of FX liquidity, low transparency and poor price discovery mechanism, and capital controls and restrictions. “A decline in FX supply bookends exchange rate weakness,” Rewane said.
FX supply decreased by 35.75 per cent to $14.2 billion in 2023 from $22.1 billion in 2020, data from Rewane’s presentation indicated.
He said Naira is undervalued by 0.81 per cent at the NAFEM rate of N806.73/$ and by 31.43 per cent at the parallel market rate of N1,167/$.
