Anticipated Inflows from Borrowing Predicted to Drive Naira Recovery in 2024
There is optimism for Nigerian households as analysts project a potential relief for the lingering pressure on the naira, particularly in the second quarter of 2024. The basis for these projections lies in the anticipated inflows from external borrowing, donor support, as well as revenue generated from oil production and sales receipts.
“We expect donor support and external borrowing to boost FX reserves,” Razia Khan, managing director and Chief Economist, Africa and Middle East Global Research, Standard Chartered Bank, said in a note.
Apart from the $800 million allocated by the World Bank for palliative funding to mitigate the economic impact of subsidy removal on Nigeria’s most vulnerable, it has been stated that the World Bank is anticipated to approve approximately $1.5 billion in swiftly disbursing budget support under the 2023 budget. A similar amount is expected to be made available for the 2024 budget.
“Nigeria hopes to draw on World Bank project financing of about $1.9 billion, although this may occur only in the medium term.
Authorities hope that oil-backed borrowing from Afreximbank (sometimes described as the forward sale of oil), a syndicated loan for Nigeria LNG, and support from Middle Eastern sovereigns will allow them to meet an aggregate FX inflow goal of about $10 billion, allowing the CBN to clear its verified FX forwards settlement backlog and stabilize the market.
“Authorities also hope that plans for banking-sector recapitalization will attract new flows,” Khan said in the note.
“2024 is looking much better for Nigeria. The naira is at a realistic, even cheap level. We have probably seen the worst of the rise in the inflation rate, presuming the CBN can keep money printing to a minimum,” Charlie Robertson, head of Macro Strategy FIM Partners UK Ltd, said in an emailed response.
“I expect the current account to be around balanced levels or even at a surplus, helping the US dollar supply issue. However, the government needs to keep its spending under control and work to reduce the budget deficit, and oil prices are unlikely to boom, at least in the first half,” he said.
Analysts have noted that a stronger Naira has the potential to attract foreign investment and stimulate the expansion of local businesses if it materializes as anticipated. This favorable currency scenario could contribute to increased purchasing power for households, resulting in reduced spending on essential items such as food and fuel.
On Friday of last week (December 29, 2023), Nigeria successfully received $2.25 billion out of the long-awaited $3.3 billion foreign exchange support facility from Afreximbank. This funding is specifically aimed at addressing the acute foreign exchange shortage that has been adversely impacting the country’s economy.
As of December 28, 2023, Nigeria’s external reserves saw a marginal increase of 0.28 percent, rising to $32.892 billion from the previous week’s figure of $32.800 billion, according to data from the Central Bank of Nigeria (CBN).
Muda Yusuf, the Chief Executive Officer of the Centre for the Promotion of Private Enterprise, emphasized that the foreign exchange outlook would be significantly influenced by developments in the supply and demand fundamentals.
On the supply side, he highlighted variables such as the potential for increased investment in the oil and gas sector, leveraging the Petroleum Industry Act. Additionally, addressing the backlog of foreign exchange by the CBN could boost investor confidence and enhance inflows in the medium to long term.
The growth of diaspora remittances and other inflows from Foreign Direct Investment (FDI) and foreign portfolio investment are also key factors.
Yusuf further pointed out the importance of fostering growth in non-oil exports through new initiatives in solid minerals, enhancing domestic capacity for export, and government initiatives to boost forex liquidity.
Additionally, he mentioned steps taken to securitize dividends from the Nigeria Liquefied Natural Gas (NLNG) to generate short-term forex liquidity. These variables collectively contribute to shaping the overall foreign exchange landscape for Nigeria.
Olanrewaju Kazeem, Group CEO of Alert Group, said, “I expect a gradual economic recovery from Q2, gradual but slow recovery of the Naira from Q2, 2024. Inflation, especially food inflation, may take longer to recover, says Q3 or Q4, 2024; farmers are affected by pockets of attack in most farmlands and seasonal production may suffer setbacks.”
The outlook for Nigeria in 2024 is anticipated to be more positive compared to 2023, contingent upon the directions taken in fiscal and monetary policies. The early passage of the budget and sustained government reassurance, if accompanied by tangible actions, may contribute to reversing the downward trend in key performance indicators (KPIs) of the economy, as suggested by an expert.
Oluwaseun Dosunmu, the Head of Research at Parthian Securities, highlighted the complex and dynamic nature of the economic landscape in Nigeria for 2024. He expressed concerns about a potential bubble burst in the equities market due to the recent surge in market valuations.
The sustainability of these valuations is uncertain and may lead to a rapid correction. The fate of corporate earnings is closely tied to volatile exchange rates, with gains or losses in this area expected to significantly impact the financial performance of businesses. Additionally, the prevailing high-interest rate environment adds complexity, influencing various sectors and shaping investment decisions.
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Onoja Usman, the Managing Director/CEO of Lovonus Microfinance Bank Limited, remarked that the economic situation was already challenging before the new government came into office.
He emphasized the significance of the approach taken to tackle problems, noting that different approaches have varying timelines for effectiveness. Usman predicted challenges in the foreign exchange market and a further depreciation of the naira.
