Why naira will remain on shaky footing: Capital Economics
Naira’s recent gains against the dollar look likely to fade, considering that inflation remains extremely high, London-based Capital Economics has said.
Inflation in Nigeria rose further in November to 34.6% from 33.88% in the previous month, official data released on Monday shows.
After months of weakening, the naira finally appreciated against the dollar this month, helped by more central bank FX reforms and Nigeria’s recent Eurobond sale, David Omojomolo, Africa economist at Capital Economics said in an emailed note.
“Even so, we think high inflation will leave the naira on shaky footing in the near term,” he said.
He said the naira’s appreciation of about 10% this month to 1,530/$ would have been welcomed by Central Bank of Nigeria Governor Yemi Cardoso, given its struggles most of this year.
Omojomolo pointed out that some have looked to pin the gains on Cardoso and his CBN team, who introduced more foreign exchange reforms earlier this month including a new electronic FX trading platform designed to enhance efficiency and transparency in the naira market.
He said: “We think the naira was also helped by the government’s successful issuance of $2.2 billion of Eurobonds this month. The issue was more than four times oversubscribed, with foreign investors attracted by Nigeria’s high yields and improved external position (foreign reserves have risen for three consecutive months to over $40bn).
“We have been here before though, with portfolio investment frequently spiking after CBN reforms but the naira soon after depreciating again. The naira’s performance on the parallel market suggests that could happen again, with the initial naira gains in this market quickly fading.
“And worse still the long-standing discount the parallel rate is trading at compared to the official rate has widened to around 10% the largest gap in more than six months. All in all, this suggests that against a backdrop of still extremely high inflation, the naira will remain on shaky footing, depreciating to 1,800/$ by the end of 2025.”
