Only foreign borrowing can save naira, clear CBN debts – EIU

The Central Bank of Nigeria currently lacks the liquidity to support the naira, according to a report by the international business research firm Economist Intelligence Unit.

In its most recent Country Report on Nigeria, which was released on Friday, it made this claim.

On June 14, 2023, the CBN combined certain segments of the nation's foreign exchange market, which caused the local currency to plummet significantly.

Since then, the naira has weakened versus the dollar, and in February, analysts say there was a second devaluation of the currency, which is roughly 45%, in an effort to bring the rate closer to that of the parallel market.

This places it behind the Lebanese pound as the second worst performing currency globally.

As per the EIU report, the CBN might have to borrow money from abroad in order to maintain the value of the naira and meet its foreign exchange requirements.
The statement read, "We believe that foreign borrowing is necessary to rebuild the CBN's buffers, completely settle a backlog of unfulfilled foreign exchange orders, and regain public trust. Probably by the end of 2024, this will only be possible. Nigeria borrowed $3.3 billion from the African Export-Import Bank in mid-January; the loan was secured by oil revenue through a facility known as the "crude oil prepayment facility." This comes after an ADB loan of $1 billion in November, and a World Bank loan of an additional $1.5 billion is being requested.

As US interest rates begin to decline in the second half of 2024, declining risk premiums on government foreign bonds will make accessing the international capital market another feasible—albeit pricey—option.

The naira will be extremely volatile for the majority of this year, which could cause regulatory erraticism and have an impact on businesses, particularly those that hold foreign currency.

"The CBN lacks the liquidity to sustain the value of the naira; of its $33 billion in foreign reserves, a significant portion—roughly $20 billion—is allocated to different derivative transactions. Oil firms are not allowed to repatriate their export earnings overseas, and the CBN may impose further restrictions on convertibility until the currency stabilises.

It was also discovered that, after the fuel subsidy was reinstated, the Federal Government had strong incentives to borrow money from the CBN.

According to the report, whose briefing sheet Benedict Craven edited, EIU stated that with the reinstatement of fuel subsidies, which were higher than the previous one, the FG had a strong reason to want to borrow from the apex bank.
The securitization of the outstanding N7.3 trillion debit balance of the ways and means advance in the Federal Government's consolidated revenue fund was approved by the National Assembly in December 2023. The CBN funds the gaps in the federal government's budget through the Ways and Means loan facility.

According to the report, "Mr. (Bola) Tinubu's market reforms were meant to draw investment, but they don't make sense as a whole." There is a fundamental conflict between his two signature initiatives, the deregulation of the currency rate and the removal of petrol subsidies. Nigeria imports almost all of its fuel, so the pump price ought to reflect naira devaluations, the most recent of which was a 45% decline in February.

Though the naira weakened from N461:$1 in May 2023 to N1,600:$1 in late February 2024, there has been little movement since June due to the threat of industrial action. This shows that a sizable subsidy has been returned. The government has a strong incentive to go to the Central Bank of Nigeria for financing to cover the fiscal cost even if it publicly denies this.

"The currency will be undermined by high inflation and inadequate monetisation. Monetary policy may be tightened to the point where foreign investors start to see the naira more favourably.

The report claims that despite the CBN's February policy rate increase, President Tinubu has stated that he dislikes high interest rates.
“As inflation has been allowed to rise to a level at which a positive real short-term interest rate would create a significant rise in unemployment—adding another policy¬ induced element to economic hardship—we assume that politics will prevent this from happening. The CBN’s independence has been heavily eroded in recent years; because fiscal firepower is so limited, the government will continue to rely on monetary policy to achieve job-creation and development objectives,” it said.

EIU revised its 2024 economic growth forecast for Nigeria from 2.2 per cent to 2.5 per cent, premised on higher than previously expected crude output and earlier than expected production from the Dangote refinery, which is expected to provide some relief although fuel import is expected to continue its dominance.

“The new, 650,000-barrel/day Dangote mega-refinery is another possible circuit breaker. The facility is gearing up for its first fuel exports, to be followed by cargoes to the domestic market. In theory, the facility can meet all domestic needs but petrol subsidies make it unclear whether doing so will be profitable (let alone profit-maximising). In any case, Nigeria will continue to depend on fuel imports for most of the year as the refinery ramps up output,” the report said.


Describing the implementation of the twin policies of floating the naira and fuel subsidy removal as hasty, the EIU said, “Mr Tinubu has embarked on the biggest economic shake-up in a generation, rapidly rolling out unpopular market reforms and dismantling vehicles for patronage and corruption. Upon coming to power, Mr Tinubu quickly moved to deregulate petrol prices and float the currency. In theory, these reforms are needed to put Nigeria on a higher growth path, but implementation has been hasty and inflation has been allowed to rise to decades-long highs. As the crisis is distinctly policy-induced, there is a serious risk of mass protests and strikes.

“Given the potential threat of industrial action on a scale not seen since 2012, the government has been forced to backtrack in some areas, notably on petrol subsidies. Attempts to stem the decline in the currency have become more desperate, and we expect the policy to become increasingly erratic, particularly in the early part of the forecast period, as the need to stabilise prices takes on an existential dimension for the government.”

The report noted that the Monetary Policy Rate would peak at 23.75 per cent this year, currently standing at 22.75 per cent.

Inflation is projected to also likely to continue climbing for the first half of the year driven by the hefty devaluation of the naira in February.

“We expect a full-year rate of 30.3 per cent, which includes some disinflation in the second half of the year,” EIU said.

Meanwhile, it projected that the Nigerian currency would depreciate below 2,000/$ before the year runs out.

Highlighting top concerns and risks to its forecast, EIU said that if President Bola Tinubu moves too fast on his market reforms, it may lead to mass unrest with a very high impact.