“We expect the naira to end 2024 at N861.5 to a US dollar,” were the words of the Economic Intelligence Unit (EIU), the research and analysis division of the Economist Group, as captured in their December country report for Nigeria.
The research firm went further to state that this forecasted exchange rate of the domestic currency should be actualized from “an estimated N848:US$1 at end-2023, marking a period of relative steadiness, although the black-market rate is likely to be volatile.”
This estimate is for the official rate as dictated by the Central Bank of Nigeria (CBN), which currently trades at an all-time high of N887 to a US dollar.
EIU explained that despite earlier market reforms hastily implemented in June this year to correct market abnormalities, pressure on the naira, which is most likely to continue, will be “perpetuated by a backlog of foreign exchange orders that the CBN is unlikely to be able to clear in full, given low foreign reserves (about one-third of the stock is tied up in loans, forward contracts, or other derivatives).”
However, the EIU stated that there is a chance that the pressure on the naira will ease in 2024 without the CBN resorting to strong-arm tactics.
It said, “Foreign exchange rules being introduced and the possibility of an oil-backed loan could be reassuring to investors and allow the backlog to be entirely cleared. A current-account surplus will be another support. Even so, the political need for currency stability would probably preclude a functioning managed float.”
Backing the above reasons, it emphasised the impact oil production from Dangote Refinery could have on the nation’s current account, creating a surplus in the process and, within the shortest possible time, hitting full capacity to end the importation of refined crude oil.
Once the prediction for Dangote refinery comes into realisation, importation of petrol should seize from 2025, a situation that should give the CBN a freer hand “to attempt convergence with the black market, taking the exchange rate to N1,162:US$1 by year-end. However, we do not expect a lasting commitment to a currency float.”
According to the EIU, the CBN might struggle with controlling inflation and lacks experience in managing money policies with a flexible exchange rate.
In the long run, it foresees ongoing market issues due to high inflation, leading to occasional devaluations whenever the gap with the black-market rate widens.
By 2028, the research firm expects an exchange rate of N1,283.5:US$1, with a continuous and significant difference between official and parallel market rates.
Meanwhile, for its inflation forecast for 2024, it said, “Inflation will continue to rise in early 2024, as a result of market reforms made in June 2023 and ongoing currency volatility on the black market, which handles a sizeable share of currency trade. However, by about mid-year, base effects should kick in, and, in the absence of further rises to petrol prices or devaluations, inflation will moderate from an estimated 28.7 percent at the end of 2023 to an average of 23.6 percent in 2024.”