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CBN “lacks experience” to conduct monetary policy under float – EIU

Naira, Dollar

Nigeria’s official exchange rate is projected to weaken to N1,068.3/$ by 2025, according to a new report by the Economist Intelligence Unit (EIU). 

The report also indicates that CBN “lacks the firepower” to clear the $6 billion forex backlog. It also claimed the central bank also lacks the experience to conduct a foreign currency float leading to a negative outlook for the naira.

In its new country report for Nigeria, the EIU noted that there would be continued currency losses due to the large size of the parallel market and the low foreign exchange reserve of the country. 

The report read: 

Nigeria’s forex scarcity 

Nigeria has been grappling with foreign exchange illiquidity, which has made the country unable to clear off its forex backlog, further worsening the value of its currency. 

President Bola Tinubu recently promised to settle the approximately $7 billion in unpaid foreign exchange commitments owing to banks through foreign currency forward contracts. 

After recognising the difficulties experienced by the business sector in the financial markets, Tinubu promised more foreign exchange liquidity in his statement at the 29th Nigerian Economic Summit in Abuja. 

Sources later verified that the CBN has begun making good on its pledge to settle some of its foreign exchange (FX) liabilities with some institutions, including Citibank, Stanbic IBTC, and Standard Chartered. 

The FX backlog, weakening investor confidence in the Nigerian economy, is on the verge of being reduced due to this development. 

However, difficulties remained in efficiently disbursing the FX despite the CBN’s efforts to clear the forex backlog and relieve pressure. 

Foreign airlines recently disclosed that about 90% of their $783m trapped funds were yet to be paid. 

It was barely surprising that the naira fell to a new low on Thursday, closing at N996.75 per dollar in the official market and N1090 per dollar in the parallel market despite the CBN’s recent move to clear some of its FX backlog.   

Highlighting on the Nigeria’s forex illiquidity, the EIU said: 

The country report also stated that additional demand in the formal market will be met with constrained supply due to the recent decision to eliminate import limitations on 43 imported commodities. 

It went on to say that the authorities haven’t shown enough willingness to implement an orthodox monetary policy to address the issues weighing on the naira, such as severely negative short-term real interest rates. 

CBN lacks firepower 

According to the EIU, a currency float may not succeed over 2024-28, as the CBN lacks the firepower to adequately supply the market or clear a backlog of foreign exchange orders, valued at over US$6bn, which will keep foreign investors unnerved.” 

It added that the CBN will continue to prop up the official exchange rate in the short to medium term through access restrictions, implying long lead times at the NFEM. 

It noted that about one-third of the official foreign reserves of about $33 billion are tied up in derivative contracts or loans. 

The EIU stated: 

The exchange rate between the naira and dollar fell to N996/$1 on Thursday hitting an all-time low at the official NAFEM.


This story was updated to reflect new information.

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