The Nigerian naira has in recent months experienced major fluctuations against the U.S. dollar, leading to a complex economic landscape that has captured the attention of economists and policymakers alike.
As of December 2024, the naira's journey through depreciation and appreciation phases has sparked discussions about its potential impact on Nigeria's economy, particularly concerning price reduction and inflation decline.
The naira's depreciation began in mid-2023 when the Central Bank of Nigeria (CBN) decided to float the currency, causing it to plummet from approximately ₦400 to a dollar to around ₦1,480 by July 2024. This drastic drop was attributed to a surge in demand for U.S. dollars in the parallel market, driven by financial institutions, money managers, and nonfinancial users, as reported by the World Bank. The scarcity of foreign exchange supply further exacerbated the situation, leading to a weakened naira.
However, recent developments have shown signs of recovery. In October 2024, the naira appreciated sharply, reaching N1,670/$1 and further strengthening to N1,640/$1 in the official market. This appreciation was largely attributed to the CBN's introduction of the Electronic Foreign Exchange Management System (EFEMS), which revolutionized FX transactions by enhancing transparency and efficiency.
Economists are optimistic that if the naira's appreciation is sustained, it could lead to a significant reduction in the prices of imported goods, thereby contributing to a decline in the country's headline inflation, which stood at 33.88 percent in October 2024.
A stronger naira makes imports cheaper, reducing inflationary pressure by lowering the cost of imported goods. This relationship between currency appreciation and inflation is well-documented, as a stronger currency tends to decrease domestic price levels by making foreign goods more affordable.
Despite these positive prospects, some economists caution that the impact of naira appreciation on food prices may not be immediate. It will take time for Nigerians to feel the effects of the strengthened currency on the prices of goods and services. The lag in price adjustments is due to various factors, including existing contracts, supply chain dynamics, and market inertia.
The broader economic context also plays a crucial role in shaping the naira's trajectory. The Federal Government's Medium Term Expenditure Framework (MTEF) for 2025 has been met with skepticism by economists and financial market analysts. The proposed budget of N47.9 trillion, with an exchange rate pegged at N1,400 to a dollar, has been dismissed as overly optimistic given the current average exchange rate of above N1,600 in both official and parallel markets. The assumptions underpinning the budget, including oil production targets and inflation projections, have raised concerns about their feasibility.
Economist Marcel Okeke criticized the N1,400/$ peg, stating, "The N1,400 is not realistic. If they have pegged it at N1600, where we are now, it can be accepted but N1,400 is too optimistic." Similarly, the Lagos Chamber of Commerce and Industry urged the government to reassess the assumptions for the 2025 budget due to the challenges posed by high inflation and the exchange rate.
The naira's performance is further complicated by external factors, such as global oil prices and geopolitical developments. The recent election of Donald Trump as President of the United States has introduced uncertainties regarding oil prices, as his stance on increasing local production could lead to a drop in global oil prices, potentially affecting Nigeria's revenue from oil exports.
As the naira continues to navigate these turbulent waters, the CBN remains committed to stabilizing the foreign exchange market. Initiatives such as the introduction of an electronic FX matching platform and interest rate hikes aim to address FX liquidity challenges and support the currency. However, Fitch Ratings cautions that the FX market has yet to stabilize, and the ongoing flexibility of the exchange rate remains to be tested.
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