In a recent report by the Economist Intelligence Unit (EIU), Nigeria’s official exchange rate is anticipated to weaken to N1,068.3 against the US dollar by 2025.
The report also highlights the challenges faced by the Central Bank of Nigeria (CBN), stating that it lacks the necessary resources to clear the $6 billion forex backlog.
According to the EIU, the CBN’s inexperience in conducting a foreign currency float adds a negative outlook for the naira.
The EIU report underscores the continued currency losses due to the substantial size of the parallel market and Nigeria’s low foreign exchange reserves.
It predicts a larger devaluation in 2025 to address the widening gap between official and parallel-market exchange rates, leading to a projected exchange rate of N1,068.3/$1.
Nigeria has been grappling with foreign exchange illiquidity, making it challenging to clear the forex backlog and contributing to the devaluation of the naira.
President Bola Tinubu has pledged to settle the approximately $7 billion in unpaid forex commitments to banks through foreign currency forward contracts, aiming to alleviate the strain on the nation’s currency.
Despite efforts by the CBN to address the forex backlog, challenges persist, with foreign airlines revealing that a significant portion of their $783 million trapped funds remains unpaid.
The recent decline of the naira in both official and parallel markets reflects the ongoing struggles with forex illiquidity.
The EIU emphasises the need for responsible fiscal management, including reducing unnecessary expenses, enhancing revenue collection, and implementing targeted subsidies to mitigate the impact of economic challenges.
The report also calls for the promotion of national unity and cohesion to bridge divides along ethnic, regional, and religious lines.
While a currency float may be attempted in the coming years, the EIU doubts its success, citing the CBN’s lack of firepower and experience in conducting monetary policy under a float.
Sizable devaluations are anticipated in 2025, further complicating the exchange-rate regime and potentially leading to periodic devaluations.
As Nigeria grapples with forex scarcity and economic challenges, the EIU report emphasises the importance of comprehensive measures to stabilise the currency, boost investor confidence, and foster sustainable economic growth.
Source: Nairametrics