Exchange Rate: CBN Expects Pressure on Naira to Subside in Q3-2023
The Central Bank of Nigeria (CBN) expects the renewed pressure in the foreign exchange (FX) market and the accompanying depreciation of the naira to subside from the third quarter of 2023, according to the medium-term expenditure and fiscal strategy paper of Nigeria’s finance ministry.
The naira has been declining across foreign exchange markets due to higher demand and lower supply, disrupting the currency’s equilibrium spot price.
At the official window, the naira traded above N430 to a United States (US) dollar after a large currency depreciation not due to outright repricing by the monetary authority – market forces find a weaker value for the exchange rate.
According to the report, Nigeria continues to face risk aversion in global capital markets. It stated further that the development will put additional pressure on foreign exchange markets, noting that foreign investors have yet to return to Nigeria’s market.
The finance ministry report affirmed the stock market position that local investors, both institutional and retail, have become the dominant force driving transactions in the local bourse – a pattern spotted since the beginning of the year.
In the fixed-income market, the CBN premium on spot pricing has been used to attract foreign interest into open market operations (OMO Bills); yet inflows have been minimal.
The Nigerian economy has sustained recovery from the previous recession triggered by the COVID-19 outbreak for the fifth consecutive quarter, growing by 3.11% in the first three months of 2022.
The report agrees that Nigerians, like many other economies in developed, emerging, and frontier markets, face lingering effects of the COVID-19 pandemic. The pressure has also been fuelled by higher global food prices and fuel prices amidst the Russia-Ukraine war.
Rising oil prices have become another burden for the Nigerian government, leading to higher subsidy payments. Landing costs of crude have persistently outpaced regulated fuel pump prices.
While pump prices have risen above N165 per litre, the Nigerian government has failed to officially inform citizens that fuel prices have been adjusted. The pump price of premium motor spirit, or petrol, has been adjusted to N175 at filling stations by major marketers, while some are selling above this level.
Other hydrocarbon prices have increased, including diesel, Jet A1, and kerosene. Airline operators have also reacted to rising costs of maintenance and the purchase of Jet A1 by increasing local flight ticket prices.
Analysts said the development, a fresh market dynamic, will drive Nigeria’s headline inflation rate upward in the second half of 2022. In June, Nigeria’s inflation rate worsened to five years high at 18.60% from 17.71% in May, according to the National Bureau of Statistics.
The federal government is now projecting a higher inflation rate for the fiscal year 2023. The policy authority said inflation will average 17.16%, up from the revised average of 16.11% for the current year.
Nigeria’s worsening inflation rate aligns with the global trend, as the United States experienced its highest inflation rate in 41 years, at 9.10%. READ: Nigerian Economy Scores ‘Highs’ and ‘Lows’ in Fresh Rating
The galloping inflationary conditions have forced central bankers around the world to adopt a hawkish stance on monetary policy rates. The Central Bank of Nigeria has also joined the league of economies willing to fight red-hot inflation with interest rate hikes.
“Upward pressures on prices are expected to be driven by the current and lag effects of global price surge due to the Russia-Ukraine war, domestic insecurity, rising costs of imports, exchange rate depreciation as well as other supply-side constraints”, the report said.
Recall that in less than three months, Nigeria has raised its benchmark interest rate twice. In May, after 2 years of dovish stance, the monetary policy committee of the CBN increased the interest rate by 150 basis points, from 11.5% to 13%.
Just in July, another 100 basis points interest rate hike was booked by the CBN, thus taking the monetary policy rate to 14% to make the Nigerian economy competitive for hot monies.
The fiscal strategy report said that up to the second quarter of 2022, the exchange rate, inflation and gross domestic growth rate varied adversely from targets. The nation’s external reserves have steadied at about $40 billion in the first half of 2022.
This was driven by a $1.25 billion Eurobond raised by Nigeria’s Debt Management Office (DMO) in the first quarter of the year, while oil inflow contributions have been unimpressive.
In the first four months of the year, the finance ministry hinted in its report that the average crude oil price exceeded the budgeted benchmark price of $73 used to prepare the spending plan for the year.
However, the report said higher oil prices recorded in the period were offset by the Nigerian government’s inability to produce the volume allocated by the oil group and allies, OPEC+.
With the crude oil market expected to remain stable, Nigeria is estimated to spend N6.72 trillion on petrol subsidies in 2023 if the Nigerian government maintains the subsidy.
# Exchange Rate: Nigeria Expects Pressure on Naira to Subside in Q3-2023
