Analysts Forecast Increased Pressures On Economy As Naira Depreciates By 23%

With the naira losing 23 per cent value in the third quarter of 2023, plummeting from N770/$1 at the end of the second quarter to over N1000/$1 by the end of the third quarter at the parallel market, analysts expect further pressure on the currency in the fourth quarter of 2023. Meanwhile, the official exchange rate at the end of the third quarter was N755.27/$1, a noticeable drop from N769.25/$1 at the end of the second quarter. The widening gap between the official and unofficial rates reflects the persistent scarcity of foreign exchange in the country, as well as the divergent policies of the CBN and the market forces. The Central Bank of Nigeria (CBN) has blamed the forex backlog estimated at between $6 billion to $10 billion as the major reason for the currency depreciation. At the recent Senate confirmation of the CBN governor, Yemi Cardoso stated that he intends to establish the exact unsettled obligations and find ways to “take care of it” confirming that progress will not be made without clearing the backlog. He said it would be naive to think that the CBN will be able to make progress if it don’t handle that side of the foreign exchange. “But definitely, the immediate priority will be to verify the authenticity and extent of the unsettled obligation and once we do that, we need to look for a way to take care of it. The naira’s weakness has had negative impacts on the Nigerian economy, as it has increased the cost of imports, fuelled inflation, eroding purchasing power, and discouraged investment. According to the Head of Macro Strategy at FIM Partners UK Ltd, Charlie Robertson, the CBN may have to devalue the official rate again to align it with the market reality and conserve its dwindling external reserves, which fell from $34.1 billion at the end of June to $33.2 billion at the end of September. He noted that further devaluation might be avoided if the apex bank is able to meet its obligations to clear forex backlogs, adding that achieving this might require the government tap new loans from friendly countries. Stears Africa FX Monitor, a data and intelligence company, also has predicted a continued naira volatility. The company highlighted fiscal policies, external trade, and global market trends, including inflation rates, interest rates, policy events, and geopolitical factors as key factors affecting the naira’s performance. Fadekemi Abiru, Head of Insights at Stears, expressed concerns about the naira volatility. “The continued unpredictability of the naira underscores the importance of timely and informed decision-making for businesses and investors in Nigeria,” she said. The CBN had removed trading restrictions on the official market in June which drove the naira to a record low of N750 to the Dollar on the official market, down from the previous N477 to the dollar it traded for. This was the first time since 2016 that the naira had recorded a big fall on the official market before the CBN introduced a managed exchange rate in 2017.

Global current account balances to narrow in 2023 -IMF

Global current account balances increased for the third consecutive year in 2022 and are projected to narrow in 2023, the International Monetary Fund (IMF), has said. According to the Fund, the widening over the three years reflects several factors, including the unequal impact of the COVID-19 crisis in 2020–21 and the increase in commodity prices fueled by the economic recovery in 2021 and supply concerns following the Russia-Ukraine war.   In a report titled, ‘External rebalancing in turbulent times; the Fund stated that the absence of widespread sudden stops during the pandemic enabled deficit economies to avoid an abrupt contraction of their current account deficits. “Currency markets exhibited significant fluctuations in 2022, driven by changes in the terms of trade and monetary tightening,” the Fund stated.   The report stated that an accumulation of official foreign exchange reserves played a limited role in net capital outflows from emerging market and developing economies just as net creditor and debtor positions remained at historically high levels. “Over the medium term, global current account balances are expected to narrow as the impacts of the pandemic and Russia’s war in Ukraine recede. However, several risks surround this outlook, including a renewed increase in commodity prices, a slower-than-expected recovery in China, or a slower fiscal consolidation in economies with current account deficits. While the impact of geoeconomic fragmentation on global current account balances is unclear, it would unambiguously reduce global welfare. The excess global current account balances (defined as the sum of absolute values of current account surpluses and deficits in excess of their norms) have remained unchanged since 2021, after being on a declining trend for several years. While the widening of global current account balances is not necessarily a negative development, excess global current account balances can fuel trade tensions and protectionist measures or increase the risk of disruptive currency and capital flow movements. “Narrowing excess global current account balances would reduce the risk of financial crisis and improve welfare. Policy efforts, in both excess surplus and deficit economies, are required to promote external rebalancing. Where excess current account deficits in 2022 partly reflected larger-than-desired fiscal deficits, fiscal consolidation will help stabilize debt-to-GDP ratios and close current account gaps.” The Fund pointed out in the report that in economies where excess current account surpluses persist, higher fiscal spending in targeted areas will help them to meet their goals in climate, digital, and energy security, while reducing their excess surpluses. “Economies with lingering competitiveness challenges will need to address structural bottlenecks. Multilateral cooperation will help counter risks of geo-economic fragmentation, including efforts to strengthen the current rule-based trading system, and facilitate the green transition. Successfully completing the 16th General Review of Quota would ensure that the IMF is adequately resourced to serve as an anchor of the global financial safety net,” it further explained.