The naira will not get a respite anytime soon after the Economist Intelligence Unit predicted that the Nigerian currency will experience a three-year decline.
According to the research firm, the exchange rate is expected to depreciate to N1.068 per dollar in the period 2023 to 2025.
Nigeria to experience forex losses until 2025
In its report for Nigeria, the company said that the country would continue to experience currency depreciation due to the large black market and low foreign exchange reserves.
The EIU changed its forecast for the exchange rate in 2025 to a more significant devaluation to reflect the increasing difference between the official exchange rate and the parallel exchange rate.
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In the report, the EIU predicted that Nigeria would attempt to unify the different exchange rate windows once this happens.
EIU said:
“We have adjusted our average exchange-rate forecast for that year to N1,068.3:US$1, from N914.4:US$1 previously. As our forecast for continued currency losses over time has not changed, the projected rate is also now weaker for later years.
A chartered banker, Uzochukwu Okewu, agreed with EIU. Okewu said the size of the country’s Forex reserves is hugely affecting the naira. He said investors, especially portfolio investors, consider the size of a country’s FX reserves before investing.
“When investors come, they first consider your reserve’s size if they want to pull their resources. So, now Nigeria’s reserves are abysmal, hurting the naira significantly.
“The EIU projection is on point because Nigeria is not earning enough Forex to be a buffer against depreciation. So, the naira is taking all the hit from a depleted reserve,” he said.
Foreign exchange scarcity affecting naira performance
Nigeria is currently experiencing acute foreign exchange shortage, which is affecting the naira as well as the standard of living.
The foreign exchange market saw a temporary respite a couple of weeks ago when the government reportedly injected $7 billion into the foreign exchange market to address forex backlogs.
According to Okewu, the move increased foreign exchange liquidity and provided relief to the struggling naira.
“We all saw what enough liquidity can do to a currency. When the country provided Forex for the banks to offset backlogs, the naira rebounded by as much as 20%, but as soon as that dried up, the naira began to tumble again,” he said.
On Thursday 9 November 2023, the local currency crashed to a record low of N1,000 to the dollar on the official market, the lowest level in the history of the naira.
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According to analysts, the absence of forex liquidity saps investor confidence and worsens the naira’s decline.
EIU blames CBN’s lack of firepower for the naira’s crash
In its report, the Economic and Investment Intelligence Unit (EIU) argued that the CBN needed more experience and the necessary tools to cope with forex volatility.
According to the report, a gap of 35% between the official and the parallel markets opened in June when Nigeria initiated the forex reform that has now caused the naira to crash.
Okewu, however, disagreed with the EIU and argued that what needed to be improved was the political will and the expertise to deal with the foreign exchange problem.
“I believe it is not the issue of competence but of political will to make the hard decision,” he said.
According to the report, the Central Bank of Nigeria (CBN) is not willing to clear Forex balances worth more than $6 billion, leading to a dry run on the naira by 2028.
The Economic and Investment Union (EIU) reported that about a third of the country’s $33 billion in official foreign reserves are tied up in derivatives contracts or loans.
According to the report, about a third of the country’s official foreign exchange reserves (about $33 billion) are held in derivatives or loans.
The EIU stated:
“Sizable devaluations are expected in 2025—or possibly sooner—causing a 38.5% loss against the US dollar over the year, to N1,142.5:US$1 at end-December,” the report said.
After injecting $7 billion to settle forex balances, naira plunges again in the official market
According to Legit.ng, the naira stopped its four-day rally at both the official and parallel market after the Central Bank of Nigeria (CBN) started clearing Forex queues that led to the naira’s crash.
Analysts attribute the naira’s current woes to the lack of foreign exchange (Forex). Importers and exporters have been scrambling for the few dollars that are available for conversions.
On Tuesday, 7 November 2023, the naira-dollar exchange rate fell from N809.91 per dollar to N809.00 per dollar on the official market.
