The Economic Intelligence Unit (EIU) cautions that the Central Bank of Nigeria (CBN) lacks the necessary capacity to address the backlog of foreign exchange orders valued at over $6 billion. The warning comes as the CBN reverts to a supportive monetary system after an unsuccessful experience with the “managed float” system, which led to a significant loss in the naira’s exchange value. The EIU’s report notes challenges with Nigeria’s foreign reserves and encumbered assets, suggesting that the official exchange rate will face pressure without adequate support.
Key Points:
- CBN’s Forex Backlog:
- The EIU warns that the CBN does not possess sufficient firepower to clear the backlog of foreign exchange orders, which is valued at over $6 billion.
- The return to a supportive monetary system follows the challenges faced by the CBN with the “managed float” system, resulting in a substantial loss in the naira’s street market value since June.
- Impact on Naira:
- The report suggests that without supportive monetary policies, the naira will remain under pressure, leading to a continued depreciation.
- The EIU notes that the CBN lacks the necessary capacity to adequately supply the market or clear the substantial forex backlog.
- Foreign Reserve Challenges:
- A significant portion of Nigeria’s official foreign reserves, reported at $33 billion, is tied up in derivative contracts or loans, limiting its effectiveness in defending the currency.
- The encumbered assets raise concerns about the CBN’s ability to support the naira and address forex challenges.
- Exchange Rate Stability:
- The official exchange rate is expected to be propped up by access restrictions, leading to longer lead times at the Nigerian Foreign Exchange Market (NFEM).
- The report anticipates that the CBN would resist attempts at convergence until petrol imports are eliminated in late 2024.
- Naira Projections:
- The EIU projects a devaluation in 2025, causing a 38.5% loss against the US dollar over the year, with a rate of N1,142.5:US$1 at end-December.
- The absence of a lasting commitment to a market-led naira is highlighted, as the CBN lacks experience in conducting monetary policy under a float.
- GDP and Economic Outlook:
- While Nigeria’s real GDP is expected to pick up from an estimated 2.2% in 2023, sluggish growth is anticipated in 2024 at 2.6%, influenced by high inflation and monetary tightening.
- Net exports are identified as the primary growth driver, with rebound effects and supportive factors contributing to real domestic growth in 2025.
Conclusion:
The EIU’s warning about the CBN’s lack of firepower to address the forex backlog underscores challenges in Nigeria’s monetary and economic landscape. The report raises concerns about foreign reserves, encumbered assets, and the potential impact on the official exchange rate. The projections for the naira’s depreciation and challenges with sustaining a market-led approach highlight the complexities facing Nigeria’s monetary policies. The overall economic outlook suggests a mix of challenges and potential growth drivers, emphasizing the need for strategic measures to address economic stability.
