International business research firm, Economist Intelligence Unit, has said that the Central Bank of Nigeria does not have the liquidity to support the naira as of now.
It stated this in its latest Country Report on Nigeria, which was published on Friday.
The CBN unified segments of the country’s foreign exchange market on June 14, 2023, which resulted in a significant depreciation of the local currency.
The naira weakened by 36.56% to 632.77/$ on the day the CBN unified the forex market from 463.38/$ at the official market.
The naira has struggled against the dollar since then and it worsened in February following a second devaluation, which is about 45 per cent according to analysts in an attempt to close the gap with the parallel market rate.
That makes it the second-worst-performing currency in the world, after the Lebanese pound.In the report, EIU said that the CBN may need to resort to foreign borrowing to support the naira and fulfil its foreign exchange obligations.
It stated, “Our view is that it will take foreign borrowing to rebuild the CBN’s buffers, fully clear a backlog of unmet foreign exchange orders and restore confidence.
This is probably only achievable towards the end of 2024.
In mid-January Nigeria took out a $3.3bn loan from the African Export-Import Bank, secured on oil revenue in a so-called crude oil prepayment facility.
This follows a $1bn loan from the African Development Bank in November, and another $1.5bn is being sought from the World Bank.
“Falling risk premiums on government international bonds make tapping the international capital market another viable (albeit costly) option once US interest rates start to fall from the second half of 2024.
“For most of this year, the naira will be highly volatile, leading to regulatory erraticism that can affect businesses, especially those holding foreign currency.
“The CBN lacks the liquidity to support the naira itself; out of $33bn in foreign reserves, a large share (estimated at nearly $20bn), is committed to various derivative deals. The CBN recently imposed restrictions on oil companies repatriating export earnings abroad, and there is a risk of wider convertibility limits being imposed until the currency stabilises.”
Also, it was revealed that the Federal Government was greatly incentivised to borrow from the CBN following the return of fuel subsidy.
In the report, whose briefing sheet was edited by Benedict Craven, EIU said that with the return of fuel subsidy, which was larger than the previous one, the FG had a strong reason to want to borrow from the apex bank.
In December 2023, the National Assembly approved the securitisation of the outstanding debit balance of N7.3tn of the ways and means advance in the consolidated revenue fund of the Federal Government.
Ways and Means is a loan facility through which the CBN finances the Federal Government’s budget shortfalls.
The report said, “Market reforms under Mr (Bola) Tinubu were intended to attract investment but do not constitute a coherent plan. His two flagship policies, the elimination of petrol subsidies and the liberalisation of the exchange rate have an inner contradiction. As Nigeria imports virtually all its fuel, devaluations of the naira, the latest being a 45 per cent drop in February, should be reflected in the pump price.“
However, owing to the threat of industrial action, there has been little movement since June, despite the naira having weakened from N461:$1 in May 2023 to N1,600:$1 in late February 2024. This indicates the return of a (large) subsidy. Denying this publicly, the government has a strong incentive to turn to the Central Bank of Nigeria for financing to cover the fiscal cost.
“Deficit monetisation and high inflation will undermine the currency. A possibility is that monetary policy will be tightened to a point at which foreign investors view the naira more favourably.”
According to the report, although the CBN raised its policy rate in February, President Tinubu has expressed an aversion to high interest rates.
“As inflation has been allowed to rise to a level at which a positive real short-term interest rate would create a significant rise in unemployment—adding another policy¬ induced element to economic hardship—we assume that politics will prevent this from happening. The CBN’s independence has been heavily eroded in recent years; because fiscal firepower is so limited, the government will continue to rely on monetary policy to achieve job-creation and development objectives,” it said.
EIU revised its 2024 economic growth forecast for Nigeria from 2.2 per cent to 2.5 per cent, premised on higher than previously expected crude output and earlier than expected production from the Dangote refinery, which is expected to provide some relief although fuel import is expected to continue its dominance.
