Economic Intelligence Unit Predicts Naira’s Future, Dangote Refinery Impact, and Inflation Outlook
The Economic Intelligence Unit (EIU) offers insights into the future of Nigeria’s economy, making predictions on the Naira’s exchange rate, the impact of the Dangote Refinery on the current account, and the inflation outlook. The research division of the Economist Group anticipates challenges for the Naira but suggests potential stability and a shift in the forex market, driven by oil production and current-account dynamics.
Key Points:
- Naira Exchange Rate Forecast:
- EIU predicts the Naira to end 2024 at N861.5 to a US dollar, based on an estimated N848:US$1 at the end of 2023. This forecast considers relative steadiness in the official rate, although acknowledging likely volatility in the black-market rate.
- Factors Influencing Naira Pressure:
- Despite market reforms implemented in June, the EIU expects continued pressure on the Naira, fueled by a backlog of foreign exchange orders that the Central Bank of Nigeria (CBN) may struggle to clear due to low foreign reserves. The CBN’s ability to maintain a managed float is limited.
- Potential Easing of Naira Pressure in 2024:
- EIU suggests that foreign exchange rules and the possibility of an oil-backed loan could ease pressure on the Naira in 2024. A current-account surplus, reassurance to investors, and the impact of Dangote Refinery on oil production are cited as supportive factors.
- Dangote Refinery Impact:
- The Dangote Refinery’s potential to boost oil production and create a current-account surplus is emphasized. Once operational, the refinery could end crude oil importation by 2025, providing the CBN with opportunities for forex market convergence.
- CBN’s Challenges in a Floating Exchange Rate Scenario:
- While predicting a possible attempt at convergence with the black market, the EIU notes that the CBN might struggle with managing inflation and lacks experience in policies with a flexible exchange rate. A lasting commitment to a currency float is not expected.
- Inflation Outlook:
- Inflation is expected to rise in early 2024 due to market reforms and currency volatility on the black market. However, base effects are anticipated to moderate inflation by mid-year. The forecast suggests a decline from an estimated 28.7% at the end of 2023 to an average of 23.6% in 2024, provided there are no further rises in petrol prices or devaluations.
- Long-Term Exchange Rate Challenges:
- EIU foresees ongoing market issues leading to occasional devaluations when the gap between official and parallel market rates widens. By 2028, the research firm anticipates an exchange rate of N1,283.5:US$1, with a significant difference between official and parallel market rates.
Conclusion: The EIU’s insights provide a comprehensive outlook on the challenges and potential scenarios for Nigeria’s economy. The interplay of factors such as oil production, forex market dynamics, and inflation will shape the country’s economic trajectory in the coming years.
