By Taiwo Adebowale
ABUJA, Nigeria – In a critical blow to the hopes of economic stability, Fitch Ratings has projected that the Nigerian Naira will continue its downward spiral, potentially settling at a staggering 1,450 per U.S. dollar by December 2024. This alarming prediction was disclosed during a post-sovereign rating webinar focused on Nigeria and Egypt, held by the international credit rating agency on Tuesday.
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The Struggle of the Naira: A Deep Dive
Since its floatation in June 2023, the Naira has been in a precarious position, constantly battling for stability. Gaimin Nonyane, Director of Sovereigns at Fitch Ratings, highlighted that the currency is still in its “price discovery mode,” suggesting that substantial volatility is expected in the near term. The Naira’s struggle is a direct reflection of Nigeria’s ongoing economic challenges, exacerbated by global economic pressures and internal fiscal mismanagement.
“The Naira is still finding its feet,” Nonyane stated. “It is still in price discovery mode. So we would expect a lot of volatility in the near term. However, there is the expectation of multilateral donor funding coming in Q3 this year, in addition to improved oil receipts. So that should help to reduce volatility somewhat by Q3 this year.”
Current State and Future Projections
Fitch Ratings has painted a bleak picture for the Naira, projecting it to average around 1200/$ this year and potentially end the year at approximately 1450/$. This forecast is contingent on the continuation of current foreign exchange reforms. The agency’s outlook hinges on the sustained momentum of these reforms, a recovery in oil receipts, and significant multilateral donor funding anticipated in the third quarter of 2024.
Reforms and Economic Recovery: A Tough Road Ahead
Earlier in May, Fitch Ratings revised Nigeria’s Long-Term Foreign-Currency Issuer Default Rating outlook to Positive from Stable and affirmed the IDR at ‘B-‘. This revision was based on the government’s efforts in foreign exchange market reforms, oil industry reforms, and monetary policy adjustments over the past year. Despite these measures, the road to economic recovery remains steep and fraught with challenges.
Key Economic Indicators and Challenges
1. Current Account and Tax Revenue:
Nonyane noted that while there are some surpluses in Nigeria’s current account, these are significantly low, below one percent of the GDP. The low tax revenue base remains a critical issue, contributing to the government’s high interest-to-revenue ratio, which currently stands at an alarming 38 percent. This ratio is about four times higher than the median for ‘B’ rated countries and is a key rating consideration for Nigeria.
2. Oil Sector Recovery:
There is an expectation of a short-term recovery in the oil sector, with the Dangote refinery anticipated to ramp up its capacity. The refinery’s operational start is expected later this year or early next year, which should help reduce transport costs and lower refined oil imports, easing foreign exchange demands.
Foreign Reserves: A Volatile Scenario
Nigeria’s gross foreign exchange reserves have been on a downward trajectory, falling from $34 billion in March to around $32.7 billion currently. Recent gains from oil receipts have been offset by the repayment of existing debt obligations, including foreign exchange swaps and sales to Bureau De Change to support the Naira.
“In terms of the outlook, we project foreign exchange reserves to rise modestly by year-end,” Nonyane said. “This would be due to a recovery in oil receipts, multilateral funding, and potentially commercial borrowing.” However, she highlighted that more than 30 percent of these reserves are tied up in bank swaps, posing significant external risks.
External Debt Servicing: Rising Pressures
Nigeria’s external debt servicing is projected to increase by about $4.8 billion in 2024 and a further $5.2 billion in 2025. This includes amortization and the $1.1 billion Eurobond due in November 2025. Sustaining the foreign exchange momentum is crucial to managing these debt obligations without further depleting reserves.
Government’s Response and Multilateral Funding
In a bid to address the financial strain, the Nigerian government is looking towards multilateral funding. Wale Edun, the Minister of Finance and Coordinating Minister of the Economy, recently disclosed on Channels Television’s “Sunday Politics” that the World Bank’s board would consider a $2.25 billion funding package for Nigeria in a matter of weeks. This funding is expected to come with minimal conditions and is aimed at stabilizing the Nigerian economy and putting it back on the growth path.
“In two weeks, the board of the World Bank will consider a $2.25bn package for Nigeria, of like virtually free or almost grant funding, very low interest in funding,” Edun stated. “A large part of it, $1.5bn, is what they call Development Policy Operation. Essentially, it is in recognition of what has been done to stabilize the Nigerian economy and get it back on the growth path.”
Public Reaction: A Mixed Bag
The forecasted plunge of the Naira has sparked a wide array of reactions from various sectors. Critics argue that the government’s economic policies are insufficient to stabilize the currency and foster sustainable growth. There is a growing sentiment that more drastic measures are needed to address the underlying issues plaguing the economy.
“This projection by Fitch Ratings is a wake-up call,” says Adewale Ogunleye, an economic analyst. “The government needs to implement more robust policies to stabilize the Naira and ensure economic growth.”
A Critical Crossroad for Nigeria
As Nigeria grapples with these economic challenges, the next few months will be crucial. The government’s ability to navigate this tumultuous period, implement effective reforms, and secure necessary funding will determine the trajectory of the Naira and, by extension, the overall economy.
Taiwo Adebowale is Atlantic Post Senior Business Correspondent
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