Financial analysts have predicted a sustained decline of the Naira in 2024 as the exchange rate between the local currency and the Dollar at the official Nigerian Autonomous Foreign Exchange Market (NAFEM) closed the year at N907.11 per dollar marking the end of a turbulent year for the currency of Africa’s largest economy.
Despite recent efforts by the Central Bank of Nigeria to bolster the foreign exchange market, the Naira’s downward trajectory continues, raising anxieties over its impact in 2024.
This development is likely to aggravate existing inflationary pressures and further strain household budgets, particularly for those reliant on imported goods.
According to the analysts, unless President Bola Tinubu’s administration attracts international investors or increases oil production, the naira might continue to decline.
At N907.11 which was a slight appreciation from the N1,043/$1 it traded for on December 28, the exchange rate has now recorded a depreciation of 26.8 percent since June 14th, when the exchange rate market was unified by the CBN
The implications for businesses, both large and small, are also significant, with potential increases in production costs and challenges in maintaining profitability.
According to analysts at Vetiva Capital Management, on a year-to-date basis, the exchange rate has depreciated by a whopping 49 per cent after opening the year at N461.5/$1.
“The Nigerian Naira reached a new historical low on Friday, December 8th, 2023, closing at N1,099.05 per dollar in the official market. This marked the first time the Naira has crossed the N1,000/$ threshold, signifying a significant depreciation and raising concerns about its impact on the economy.
“The exchange rate on the official black market crossed the N1000 threshold on the 29th of September 2023, since then it has fallen to as low as N1260, closing the year at N1,215/$1.
They said with the NAFEX exchange rate at N1,034, most Nigerian companies will need to translate their foreign currency balances at the exchange rate.
Companies with a significant forex balance in their banks will likely record massive gains when they convert to naira assuming their positions were before the FX unification. However, companies with dollar obligations will likely book massive losses when they convert to naira using the official exchange rate.
“It’s clear that further devaluation — alongside tighter monetary policy — is needed to reduce imbalances in the FX market,” Patrick Curran, a senior economist at Tellimer Ltd.
Also, the market analysis noted that a significant rise in external reserves, material increase in foreign exchange inflows, and reduction in money supply will have a positive impact on the currency.
Earlier in June 2023, the CBN announced the unification of all segments of the forex market, collapsing all windows into a single official window for FX transactions.
Although this was part of an effort to drive liquidity and stability in the forex market in Nigeria, it appears to have had a counter-effect, as it triggered further instability in the market.
Speaking on strategies that can be used for the naira to regain strength, the founder and chief consultant of B. Adedipe Associates Limited (BAA Consult), Dr. Biodun Adedipe, said the CBN should stop government agencies from charging local operators and entities in US dollars.
According to him, the sale of crude oil to local refineries should also be made in Naira rather than in US dollars.
Adedipe said: “CBN should deal transparently with participating banks at the I&E Window. De-dollarize the economy by declaring as illegal any local transactions in US dollars (sale of assets, rent/leases, and other services, including school fees and medical bills) and ensure that government agencies stop charging local operators and entities in US dollars (quite common in the maritime sector).
“Other suggestions include the need to ensure that the sale of crude oil to local refineries should be made in Naira rather than dollars. “
“President Bola Tinubu should have a direct engagement with bank CEOs to generate ideas and use moral suasion to enlist their support for the market reforms. Face the reality that unified exchange rates (not any different than floating the Naira) is a poor policy choice for a structurally defective and weak economy like ours,” he added.
