Economist Intelligence Unit: Expect Nigeria’s Return To CBN-controlled Exchange Rate

The Economist Intelligence Unit (EIU), a global leader in global business intelligence and market insights, has predicted that the federal government will go back to a system where they have more control over the exchange rate.

The group also said pressure on the naira is expected to continue in the near term, falling to as low as N1,018 per dollar in 2027, as high and rising inflation persists.

The EIU in its latest report about the Nigerian currency, said the move would be taken to try and stop the naira from losing its value much further.

It pointed out that the Central Bank of Nigeria (CBN), which manages the country’s money, doesn’t have much experience handling a flexible exchange rate system. Before President Bola Ahmed Tinubu decided to change the system, Nigeria had been somewhat successful in managing the naira’s value and its impact on the economy.

The EIU said, “The CBN lacks experience in conducting monetary policy under a float, and the need to control rapidly increasing inflation will become more acute over time.

“Our forecast is finely balanced, but we expect a return to heavier exchange-rate management from the second half of 2023 as the naira slides beyond N800:US$1 from N770:US$1 in early July.”

The research firm argued that there is currently a shortage of foreign currency in the country, especially when it comes to fulfilling demands for foreign exchange through Form A and M. This, combined with speculators taking advantage of the situation, might push the CBN to step in more and “intervene” in the market, especially since about 98 percent of their foreign reserves are in cash.

However, the EIU noted that Nigeria’s foreign reserves are still relatively liquid, which means they can pay for imports for at least another six to eight months.

Some analysts believe this gives the government enough time to increase revenue, stop financial leaks, and pay off some debts.

The report also projected that because of the unstable exchange rate and how it affects people’s lives, the naira will lose its value more slowly than expected in the medium to long term.

They estimated that the average rate will be “N815 to US$1 in 2024” and will further decline to “N1,018 to US$1 by the end of 2027”.

This is around 10 to 15 percent less than what the black-market exchange rate would be during the same period.

Meanwhile, Naira on Friday depreciated by 0.93 percent at the Investors’ and Exporters’ (I&E) forex window, Nigeria’s official foreign exchange (FX) market, following a shortage of dollars.

After trading on Friday, the dollar was quoted at N775.76 as against N768.60 quoted on Thursday at the I&E window, data from the FMDQ indicated.

The FX market recorded a decline in turnover, which dropped by 38.89 percent to $54.18 million on Friday from $88.66 million on Thursday.

Willing buyers and sellers maintained bids as high as N799.50 per dollar, which was stronger than N869 per dollar on Thursday and N845/$1 bid on Wednesday.

The market auction also recorded lower bids of N465.00, stronger than N730.00, bid maintained on Thursday and Wednesday at the I&E window.

At the parallel market, the naira strengthened by N3 as the dollar traded at N867 at the close of market on Friday from N870 on Friday morning.

This represented a 0.34 percent gain when compared to N867 traded since the beginning of the week.

On June 14, 2024 the CBN collapsed all segments of the FX market into I&E window, Nigeria’s official foreign exchange market, and re-introduced the willing buyers and willing sellers.

Consequently, the official exchange rate rose from N463.38/$ to N775.76, the current rate.

“Foreign-exchange scarcity will persist in the near term despite partial unification of the official and the black-market exchange rates. We expect the Central Bank of Nigeria to revert to heavier management of the exchange rate in late 2023 to tame rapid price rises,” analysts at EIU said.

The EIU report noted that The CBN unified Nigeria’s multiple exchange rates in June, leading to the sharpest devaluation of the naira in history and a sharp narrowing of the (formerly 60 per cent) spread with the black-market rate, to about 3 percent. The new exchange rate is classed by the CBN as a “managed float”, but there are inconsistencies in application to a more liberal currency regime as foreign-exchange access restrictions still apply to an array of imports.

This will unnerve foreign investors, and a backlog of foreign-exchange orders the CBN failed to clear before opening up the market and deeply negative real interest rates will keep liquidity tight.