Article Summary
- President-elect Tinubu plans to reform Nigeria’s naira system, focusing on fiscal, monetary, and trade issues.
- The official exchange rate is expected to gradually decline, potentially increasing the value of the naira in the black market.
- Challenges include a significant disparity between the managed and parallel markets, requiring reforms to stabilize the exchange rate and improve the business environment.
The President-Elect of Nigeria, Asiwaju Bola Tinubu, will take office in less than a week. With a lot of promises made and very high expectations from Nigerians, the president-elect takes office.
In his campaign platform, Tinubu pledges to “carefully review and better optimize” the naira system with measures for economic changes to address fiscal, monetary, and trade issues. Reform of gasoline subsidies and the liberalization of the foreign currency market, the main policy priorities are evident.
A Pan-African credit rating agency, Agusto & Co, predicted a gradual decline in the official exchange rate to 480–500/$ for this year, which would indicate a willingness to change course, and probably lead to an increase in the value of the naira in the black market to N650–N680/$. The naira at the time of filing in this report traded around N755/$
In addition, a recent report from Absa Group Ltd., a financial services company based in Johannesburg, the Nigerian currency will depreciate by 15% once Tinubu is inaugurated to address serious trade imbalances and a lack of dollars.
Absa’s fixed-income and currency researcher, Nikolaus Geromont, stated there was a noticeable disparity between the managed and parallel markets. The difference is close to 60%.
According to Geromont, since the managed floating rate was adopted in 2016, “this discrepancy between the official and parallel markets is among the widest.” After the inauguration of the new president, we anticipate the naira to be moved upward to 530/USD, due to Tinubu’s request for greater flexibility in the currency rate system.
Nigeria embraced a multiple exchange rate regime by keeping a stronger pegged rate for official transactions and a weaker rate for unofficial transactions. This method was used to avoid a complete devaluation of the naira.
The Central Bank of Nigeria (CBN) said at the time it operated a “managed float” policy that allowed it to intervene in the foreign exchange market if necessary, but now, the controlled nature of the forex system has pushed demand into the informal black market, creating a major contradiction between formal and parallel markets.
What you should know
For the avoidance of doubt, economic theory holds that exchange rates are determined by inflation, interest rates, government debt, political stability, and the health of a country’s economy, especially growth and development, trade balances, and current account balances.
Critics have over time attacked the CBN strategy as flawed because it does not appear to take into account the structure of the Nigerian economy. First, the Nigerian economy is largely informal. Lacking reliable data, analysts assume the economy is about 70% informal and 30% formal. Second, the Nigerian economy is an import-dependent or trading economy.
Naira’s prospects will improve significantly if petrol subsidies are also abolished, and oil industry reforms are implemented, as the next president plans to abolish them. Petrol subsidies cost the Nigerian nation at least N11 trillion under President Buhari.
Consequently, MPC member Idiahi Obadan said in a statement posted on the CBN website that reversing the decline in crude oil production in Africa’s largest oil producer would boost foreign exchange reserves, but said was insufficient now to keep the exchange rate stable. Nigeria’s foreign exchange reserves total $34.5 billion, equivalent to about six months’ worth of imports of goods and services.
Nigeria is largely dependent on crude oil and natural gas, and if prices drop as expected, the situation could get worse. At least 1.5 million barrels of oil would be produced daily under Tinubu’s plan
However, the president-elect must react aggressively against slow reform momentum and high political patronage in the country’s monetary system cos this could hinder a rapid improvement in the business environment and adversely affect Naira’s prospects. There is a need to control exchange rate volatility and inflation to stem the wave of currency substitution at home.
