Naira will weaken to 500 per dollar by Dec: Fitch

Naira is expected to weaken to 500 per dollar on the official market at the end of this year, BMI Research, Fitch Solutions company, has said. 

“While the Central Bank of Nigeria (CBN) has kept the naira stable at N460/USD since late January 2023, we believe that this policy is unsustainable and expect that the exchange rate will weaken to N500/USD by end-2023,” the company said in a presentation at Fitch on Africa: Ratings Update Amid Financing Crunch webinar. 

It said reduced export earnings caused by lower global oil prices would put further pressure on Nigeria’s foreign exchange reserves over the remainder of this year. 

“We expect a more substantial weakening in 2024 to N575/USD by the end of next year, as improving economic conditions will make a slightly larger devaluation in 2024 more politically palatable,” the company said.

The currency lost about 10.0 percent of its value against the dollar between August 2022 and January 2023 as the CBN sought to narrow the disparity between the official and parallel rates, it said.

The naira has sold off again on the parallel market, with anecdotal evidence indicating that the unit traded closer to N740/USD in early April, from roughly N585/USD a year earlier, according to the presentation.

“We believe that a decline in exports will cause dollar inflows to weaken in 2023. While the value of Nigeria’s oil and gas exports reached an 8-year high of USD57.1 billion (89 percent of total exports) in 2022, we forecast that this figure will fall to USD36.6 billion in 2023,” it said.

BMI projected that crude output will decline by 0.3 percent in 2023 due to recent years’ underinvestment, unplanned outages at hydrocarbon facilities and rampant oil theft. 

It said these dynamics would weaken Nigeria’s export earnings in 2023 and cause the current account balance to flip from a surplus of 0.2 percent of GDP in 2022 to a deficit worth 1.3 percent of GDP in 2023. 

It added: “This will lower the availability of dollars in the economy, put further pressure on Nigeria’s foreign exchange reserves, and limit the CBN’s ability to keep the naira stable

“While we expect that policymakers will devalue the naira due to weak foreign exchange inflows, the extent of this will be limited in the short term. Strong price pressures – we forecast that inflation will average 20.1 percent in 2023 – and Bola Ahmed Tinubu’s weak political mandate will discourage the new President and the CBN from significantly devaluing the exchange rate.”

BMI said a substantial devaluation of the naira would exert significant upside pressure on inflation and likely diminish the President’s already-weak support base, adding that the new administration would seek to avoid this.

“In 2024, we expect that the CBN will devalue the naira more substantially, although the disparity between the official and parallel market rate will persist. We forecast that the exchange rate will be weakened to N575/USD by end-2024, a devaluation of 13.0 percent,” it added.