The International Monetary Fund (IMF) has issued a warning that the official exchange rate of the Naira may depreciate by about 35 per cent this year. This depreciation could lead to an inflation rate peaking at 44 per cent before monetary policy tightening could stabilise the situation.
As of yesterday, the Naira traded at N1,542.58 per dollar in the Nigerian Foreign Exchange Market (NAFEM). A 35 percent depreciation would bring the exchange rate to N2,081 per dollar.
In its February 2024 Post–Financing Assessment and Staff Report, the IMF observed that Nigeria's current monetary policy is not sufficiently tightened to bring inflation below 20 per cent, while pressures on the Naira persist. The report noted that in the absence of local production and the recent liberalisation of commodity imports, the exchange rate is likely to depreciate further.
The IMF reported that Nigeria had been hit by another adverse climate shock in early 2024, following severe flooding in late 2022. This has exacerbated the current weakness in agriculture, leading to a decline in output and a surge in food prices.
According to the Bretton Woods institution, Nigeria would benefit from developing a comprehensive macroeconomic and growth strategy, in collaboration with and supported by development partners. This strategy would include aggressive monetary tightening, fiscal adjustment to restore macroeconomic stability, and the implementation of climate adaptation measures.
The IMF stressed that domestic demand had weakened due to the steep fall in real incomes. Investments in the oil sector are likely to stall due to rising costs and production declines. The fund further predicted that the country’s growth could fall to zero in 2024 and only slowly recover to two percent in 2028.
The IMF highlighted that the uncertainty over Nigeria’s net international reserves level poses additional risks, as would exogenous further shocks that impact external stability, poverty, and food insecurity. The publication further stated that the fiscal deficit could increase above six percent of GDP in 2024 and 2025, driven in part by increased transfers to quell social unrest (one per cent of GDP) and a rise in the implicit fuel subsidy.
The IMF report stated, “The spike in inflation and rise in uncertainty trigger portfolio outflows, and Nigeria is unable to access Eurobond financing. Reserves decline to $17 billion in 2025. Obligations due under the RFI peak at over eight per cent of officially reported reserves."
The report further noted that Nigeria would be able to repay the fund, even under the downside scenario, assuming that the authorities continue to prioritise external debt service. However, debt service would compete directly with urgent humanitarian needs to tackle rising poverty and food insecurity which would need to be prioritised.
“Therefore, even assuming the authorities reserve the remaining SDR allocation for RFI repayments, trade-offs could be severe," the report added.
The IMF publication also highlighted that the uncertainty over Nigeria’s net international reserves level poses additional risks, as would exogenous further shocks that impact external stability, poverty, and food insecurity.
The report further stated that the fiscal deficit could increase above six percent of GDP in 2024 and 2025, driven in part by increased transfers to quell social unrest (one per cent of GDP) and a rise in the implicit fuel subsidy.
“With limited external financing options and higher expenditures, there is increasing use of CBN and domestic financing. The authorities implement expenditure measures in 2026, for example, phasing out the implicit fuel subsidy but the debt to GDP ratio still rises by six percentage points above the baseline by 2028," the report concluded.