Naira Will Continue to Depreciate – S&P
The Nigerian naira exchange rate is expected to depreciate further in 2024 despite a large devaluation booked by the government in June 2023. The authority made a move to reduce the value of the local currency which analysts said was overvalued based on market conditions at the time.
Since the devaluation, the naira exchange rate has suffered from major foreign currency dominance across the FX market as the apex bank halted intervention. The naira has lost significant value due to rising import appetite following the dollarisation of the economy.
The future of the local currency remains bleak without adequate forex inflows, research analysts at LSintelligence Associates told MarketForces Africa on Monday.
“There is no two way about it, exchange rate will be strong only when the country can generate as much FX inflows that are required for eligible imports”. In its 2024 outlook on Africa’s largest nation by gross domestic product (GDP), S&P Global also present a gory outlook for the local currency.
It said higher import costs, arrears of FX transactions, and lower FX receipts stemming from oil exports will constrain growth in FX reserves. It forecasted usable FX reserves of $28 billion in 2024. The CBN has made efforts to clear approximately $2 billion out of a $7 billion backlog of FX transactions, while Saudi Arabia has pledged FX support, according to S&P.
“We expect the current account to record a small surplus averaging below 1% through 2025 as the import bill increases faster than oil exports due to high prices”, the firm said.
While the naira trades closer to a managed float rather than being a fully free-floating currency, the exchange rate is now significantly more in line with market demand and weak supply fundamentals.
The exchange rate fell below N1,200/$1 in December 2023, recovering to about N850/$1 thereafter. S&P maintains that the naira will continue to depreciate due to structural supply constraints. NGX Crosses N52Trn as Dangote Cement Rallies
Foreign currency shortages will persist, considering the widening gap between the official and parallel rates and weak supply fundamentals In December 2023, the naira traded at approximately N900/$1 in the official market and above N1100/$1 in the unofficial market, according to S&P note. #Structural Supply Constraints: Naira Will Continue to Depreciate – S&P
