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Why the outlook for a stronger naira against the dollar in 2023 is bleak

3 years ago
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Why the outlook for a stronger naira against the dollar in 2023 is bleak

Naira’s value against the US dollar reached historic lows in 2022, especially in the black market. As the Central Bank of Nigeria (CBN) tried to consolidate the system of exchange rates into a single rate, the naira continued to deteriorate. 

Manufacturers, investors, and private individuals turned to the black market to buy foreign currency due to the limited supply of FX. 

2022 ended with the dollar selling at a rate of N740 as opposed to N565 at the start of the year.  

On the Investors and Exporters (I&E) forex window which is Nigeria’s main FX market, the naira finished 2022 with an 8.56% decline.

Current realities for the naira: The current devaluation speculation for the naira is being fueled by rising inflation and a lack of foreign currency reserves. 

Other worrisome trends are the weak performance of the current account balances, the decline in foreign reserves and the small difference between oil prices and the budget benchmark price. If these conditions persist, there could be increasing pressure on the naira in the medium term. 

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This is true even though the dollar remains relatively stable on the official market.

Drop in foreign reserves: Despite the CBN’s ongoing efforts to preserve the local currency, Nigeria’s loss in foreign reserves to $37 billion has also thrown a shadow over the naira. Additionally, oil receipts into the CBN’s coffers have virtually completely disappeared.  

  • Since the impact of the covid-19 outbreak, foreign direct investments (FDI) in Nigeria have substantially decreased, falling to record levels, putting the country’s dollar liquidity in an unsettling situation. Specifically, between January and June 2022, Nigeria received $302.13 million in FDI, according to data from the National Bureau of Statistics (NBS). 

Projections for the naira: The World Bank’s senior economist for Nigeria, Alex Sienaert, projects that debt service will eat up 123.4% of the federal government of Nigeria’s revenue in 2023. 

He stated that the expanding debt service-to-revenue ratio and the amount of Nigeria’s public debt, which will put more pressure on the local currency by 2023, are both causes for concern. 

  • “Productive spending is being squeezed out by debt payments, which have increased over the past decade and are expected to continue growing over the medium term,” he said.
  • Tatonga Rusike, an economist at Bank of America, forecasted a pessimistic outlook for the Nigerian naira. He predicted that during the next six to nine months, the value of the naira relative to the dollar might fall by about 20% at the official market. Rusike estimated that NGN traded above fair value by about that much.  
  • Domestic oil production issues (which negate the impact of rising global oil prices), ongoing US-dollar demand backlogs, depleting FX reserves, and remittances that are still below pre-pandemic levels will all exert sustained downward pressure on the naira. 

On a broad scale, the trade-weighted dollar is probably going to continue to be very strong. Throughout 2023, the dollar may very possibly fall more in the second half of the year. 

  • As the Fed approaches its expected destination and eases off from 75 basis point rises, the dollar has already reached its top relative to other major currencies. However, it is still extremely expensive and vastly “overvalued.” 
  • The strong labour market in the United States gives the U.S. FED more ammunition to tame inflation thus continually adding more pressure on frontier markets currencies like the Nigerian naira, as investors increasingly flock to the haven currency (USD). 
  • Overall, if mild recessionary factors are pushed back to the second half of 2023, the Fed will likely maintain a strongly restrictive stance, especially in the first half. Later in the year, market yields could ease, making the dollar more attractive. 
  • To increase foreign capital inflows to the economy, the International Monetary Fund (IMF) encouraged the CBN to let commercial banks set dollar buy-sale rates. According to the international organization, maintaining a stable and market-clearing currency rate is essential to boosting investor confidence and drawing more foreign money into the economy. 
Tags: CBNFDIforeign currency reservesFX reservesNigeriaoutlook for a stronger nairaWhy the outlook for a stronger naira against the dollar in 2023 is bleak
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