Nigeria: The Naira faced a bumpy road in 2023
The Nigerian Naira lost over 25% of its value on 14 June, falling to NGN 632 per USD from NGN 463 per USD a day prior, after the Central Bank of Nigeria (CBN) abolished the multiple exchange rate window and temporarily halted interventions in FX markets. From 14 June onwards, the naira continued to depreciate and displayed significant volatility: It has traded between NGN 589 and NGN 1,013 per USD. On 12 December, the currency traded at NGN 853 per USD, 46% below its value prior to the reforms on June 14.
After allowing the naira to depreciate sharply, the Central Bank attempted to reduce volatility in the FX market with milder interventions and by capping the transactions of international money-transfer operators and bureau de change operators to ±2.5% of the prior day’s official exchange rate. This, coupled with a lingering dollar shortage, translated into a significant gap between the official exchange rate and the parallel rate, which reached nearly 40%. In addition, the Central Bank skipped its September and November meetings, likely weighing on investor sentiment and adding further depreciatory pressure on the naira.
That said, the CBN made further steps towards market liberalization after Olayemi Cardoso became its governor in September. In October, the Bank lifted a veto on using foreign exchange to import 43 items. Moreover, in November, it started to clear a backlog of FX forwards of nearly USD 7 billion.
The freefall of the naira has helped fuel inflation to a nearly two-decade high in recent months, exacerbating the cost-of-living crisis and weighing on the domestic economy. In Q3, the non-oil sector of the economy decelerated to 2.7% growth from 3.5% in Q2 on a broad-based slowdown across most sectors.
There is a great deal of uncertainty surrounding the outlook for the naira: Our panelists’ forecasts for end-2024 range from NGN 650 per USD to NGN 1228 per USD. Nonetheless, the path ahead seems slightly less volatile after Governor Cardoso gave a speech on 24 November, wherein he revealed that the CBN will adopt an explicit inflation-targeting framework and provide forward guidance in its monetary policy communiqués. With this change in approach, the Central Bank aims to curb historically elevated inflation, stabilize the exchange rate and sustain economic growth. It remains to be seen how the Bank will balance these goals and the exact regime that the naira will be under; Governor Cardoso stated that “new foreign exchange guidelines and legislation will be developed, and extensive consultations will be conducted with banks and FX market operators before implementing any new requirements”.
Analysts at the EIU commented on the outlook:
“Although Mr Tinubu has a reputational stake in making a market-led naira work, the priority in 2024 will centre on currency stability to avoid stoking inflation. Underlying pressures on the naira 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). Together with negative short-term interest rates, deterring capital inflows, illiquidity leads us to expect the CBN to continue actively manage the currency in 2024.”