Foreign Borrowing Key to Naira’s Recovery, CBN Debt Clearance, Says Economist Intelligence Unit

In its latest Country Report on Nigeria, the Economist Intelligence Unit (EIU) has underscored the limited liquidity of the Central Bank of Nigeria (CBN) to sustain the naira. The report, published on Friday, suggests that foreign borrowing might be the key to rebuilding CBN’s buffers, addressing the backlog of unmet foreign exchange orders, and restoring confidence in the market.

Since the CBN unified segments of Nigeria’s foreign exchange market on June 14, 2023, the naira has experienced significant depreciation, weakening by 36.56% to 632.77/$. Subsequent devaluations, notably a 45% drop in February, have positioned the naira as the world’s second-worst-performing currency, following the Lebanese pound.

The EIU anticipates a volatile naira throughout the year, prompting regulatory fluctuations that could impact businesses, especially those dealing in foreign currency. The report indicates that the CBN’s current lack of liquidity, with a significant portion of foreign reserves committed to derivative deals, might necessitate foreign borrowing.

The EIU proposes, “Falling risk premiums on government international bonds make tapping the international capital market another viable (albeit costly) option once US interest rates start to fall from the second half of 2024.”

Furthermore, the return of fuel subsidy has incentivized the Federal Government to borrow from the CBN. Market reforms initiated by President Bola Tinubu, including the elimination of petrol subsidies and the liberalization of the exchange rate, have faced challenges and contradictions, leading to potential financial reliance on the CBN.

The EIU revises its 2024 economic growth forecast for Nigeria to 2.5%, citing higher crude output and the Dangote refinery’s earlier-than-expected production. However, concerns linger over the impact of hasty implementation of market reforms, leading to potential mass protests and strikes.

Inflation is projected to climb, with a full-year rate of 30.3%, while the Nigerian currency is expected to depreciate below 2,000/$ by year-end, according to the report.

Top concerns highlighted by the EIU include potential mass unrest if market reforms proceed too quickly. The African Development Bank echoes these concerns, emphasizing the risk of internal conflicts arising from rising fuel and commodity prices due to currency depreciation or subsidy removal.

As Nigeria navigates economic challenges, the EIU emphasizes the importance of carefully balancing market reforms to mitigate potential unrest and ensure a stable economic trajectory.