Naira May Suffer Further 35% Depreciation in 2024
The International Monetary Fund (IMF) has issued a warning that the nation’s exchange rate could potentially decrease by an additional 35 percent (i.e. losing around N550) this year, resulting in a significant increase in inflation, reaching a peak of 44 percent before the monetary policy is able to address the situation through tightening measures.
This information was revealed in the February 2024 Post-Financing Assessment and Staff Report released by the IMF. The report highlighted that the current monetary policy is not adequately stringent to reduce inflation to below 20 percent, especially with the ongoing pressures on the Naira. Additionally, the report mentioned that due to the lack of local production and the recent relaxation of commodity imports, the exchange rate is expected to further depreciate.
The IMF also pointed out that Nigeria faced another adverse climate shock in early 2024, following severe flooding in late 2022, which worsened the existing vulnerabilities in agriculture, resulting in a decrease in output and a surge in food prices. The Bretton Woods institution suggested that the country would greatly benefit from formulating a comprehensive macroeconomic and growth strategy, with the collaboration and support of development partners.
According to the report, the proposed measures to address the economic challenges in Nigeria include aggressive monetary tightening, fiscal adjustment to restore macroeconomic stability, and the implementation of climate adaptation measures. The decline in real incomes and investments in the oil sector are cited as reasons for the weakened domestic demand.
The report also predicts that Nigeria’s growth could reach zero in 2024 and gradually recover to two percent by 2028. The uncertainty surrounding the country’s net international reserves and the possibility of external shocks pose additional risks to external stability, poverty, and food insecurity.
The report highlights that the fiscal deficit could increase to over six percent of GDP in 2024 and 2025, partly due to increased transfers to address social unrest and the implicit fuel subsidy. The IMF also notes that Nigeria’s reliance on domestic financing and limited external financing options could lead to a rise in inflation, portfolio outflows, and a decline in reserves.
Despite these challenges, the report suggests that Nigeria would be able to repay the IMF, assuming the authorities prioritize external debt service. However, this would require trade-offs with urgent humanitarian needs to address poverty and food insecurity.
Hence, in the event that the authorities decide to set aside the remaining SDR allocation for RFI repayments, the potential consequences could be significant. “The lack of clarity regarding Nigeria’s net international reserves heightens the risks, especially in light of potential external shocks that could affect stability, poverty levels, and food security.” SOURCE: ARISETV
