Naira recovery seen in 2024 on expected inflows from borrowing

There is hope for Nigerian households as the lingering pressure on the naira is projected to ease this year, specifically in the second quarter of 2024, according to analysts.

The analysts’ projections are premised on the expected inflows from external borrowing, donor support, oil production, and sales receipts.

“We expect donor support and external borrowing to boost FX reserves,” Razia Khan, managing director and Chief Economist, Africa and Middle East Global Research, Standard Chartered Bank, said in a note.

In addition to $800 million of World Bank’ palliatives funding’ to cushion the economic impact of subsidy removal on Nigeria’s most vulnerable, she said the World Bank is expected to approve about $1.5 billion of rapidly disbursing budget support under the 2023 budget; a similar amount is likely to be available for 2024.

“Nigeria hopes to draw on World Bank project financing of about $1.9 billion, although this may occur only in the medium term. Authorities hope that oil-backed borrowing from Afreximbank (sometimes described as the forward sale of oil), a syndicated loan for Nigeria LNG, and support from Middle Eastern sovereigns will allow them to meet an aggregate FX inflow goal of about $10 billion, allowing the CBN to clear its verified FX forwards settlement backlog and stabilise the market.

“Authorities also hope that plans for banking-sector recapitalisation will attract new flows,” Khan said in the note.

“2024 is looking much better for Nigeria. The naira is at a realistic, even cheap level. We have probably seen the worst of the rise in the inflation rate, presuming the CBN can keep money printing to a minimum,” Charlie Robertson, head of Macro Strategy FIM Partners UK Ltd, said in an emailed response to BusinessDay.

“I expect the current account to be around balanced levels or even at a surplus, helping the US dollar supply issue. However, the government needs to keep its spending under control and work to reduce the budget deficit, and oil prices are unlikely to boom, at least in the first half,” he said.

Analysts said a stronger Naira can attract foreign investment and encourage local businesses to expand if this happens as expected. It could increase the purchasing power of households, and they would spend less on necessities like food and fuel.

Friday last week (December 29, 2023), Nigeria received $2.25b out of the $3.3bn of the long-awaited foreign exchange support facility from Afreximbank, targeted at helping the acute FX shortage that has negatively affected the economy.

Consequently, external reserves increased marginally by 0.28 percent to $32.892 billion as of December 28, 2023 from $32.800 billion recorded a week before, data from the Central Bank of Nigeria (CBN) indicated.

Muda Yusuf, chief executive officer of the Centre for the Promotion of Private Enterprise, said the outlook for foreign exchange would be influenced largely by developments around the fundamentals of supply and demand of foreign exchange.

The supply side, he said, would be driven by some variables, such as prospects of attracting more investment into the oil and gas sector, significantly leveraging the Petroleum Industry Act, the clearing of foreign exchange backlog by the CBN would impact investors’ confidence and improve inflows in the medium to long-term, and growth of diaspora remittances and other inflows from Foreign Direct Investment (FDI) and foreign portfolio investment.

Other variables, according to Yusuf, include growth in non-oil exports leveraging new initiatives to boost investment in solid minerals and improve domestic capacity to export, initiatives by the government to boost forex liquidity through crude oil forward sales by the NNPC and steps taken to securitise NLNG dividends to generate short term forex liquidity.

Olanrewaju Kazeem, Group CEO of Alert Group, said, “I expect a gradual economic recovery from Q2, gradual but slow recovery of the Naira from Q2, 2024. Inflation, especially food inflation, may take longer to recover, say Q3 or Q4, 2024; farmers are affected by pockets of attack in most farmlands and seasonal production may suffer setbacks.”

“We should expect a better 2024 than 2023, depending on fiscal and monetary policy directions. He said that the early passage of the budget and the continued reassurance of the government if supported by action, may reverse the downward trend of major KPIs of the economy.

Oluwaseun Dosunmu, head of research at Parthian Securities, said the economic landscape in Nigeria for the year 2024 presents a complex and dynamic scenario characterized by a looming threat of a bubble burst in the equities market. The recent surge in market valuations raises concerns about its sustainability, potentially leading to a rapid correction. The fate of corporate earnings is intricately linked to the volatile exchange rates, with gains or losses in this area expected to play a pivotal role in shaping the financial performance of businesses. Furthermore, the prevailing high-interest rate environment introduces an additional layer of complexity, impacting various sectors and influencing investment decisions.

According to Onoja Usman, managing director/CEO of Lovonus Microfinance Bank Limited, the economy was already bad before this new government. And in everything, approach matters a lot as in how we tackle problems differs, some approaches could be longer while some are shorter. The foreign exchange market will still be wrong, and the naira will decrease more.”