The Economist Intelligence Unit (EIU) has issued a sobering assessment, indicating that the Central Bank of Nigeria (CBN) lacks the necessary liquidity to effectively support the naira at present.
This revelation was disclosed in the latest Country Report on Nigeria, released by the renowned international business research firm on Friday.
In their comprehensive analysis, the EIU underscores the pivotal decision taken by the CBN to unify segments of the country’s foreign exchange market on June 14, 2023.
This move, aimed at streamlining exchange rate mechanisms, resulted in a notable depreciation of the local currency, highlighting the acute liquidity challenges facing the nation.
According to the report, the CBN has resorted to securing external funding to address these liquidity constraints.
In November, the Bank secured a substantial $1 billion loan from the African Development Bank, with efforts underway to procure an additional $1.5 billion from the World Bank.
The report delves into the intricacies of Nigeria’s exchange rate dynamics, pointing out a notable contradiction. Despite significant devaluations of the naira, including a staggering 45 per cent drop in February, minimal adjustments have been observed in fuel prices.
This discrepancy raises concerns about the resurgence of substantial fuel subsidies, a phenomenon the government has publicly denied.
In the words of the report, “However, owing to the threat of industrial action, there has been little movement since June, despite the naira having weakened from N461:$1 in May 2023 to N1,600:$1 in late February 2024. This indicates the return of a (large) subsidy. Denying this publicly, the government has a strong incentive to turn to the Central Bank of Nigeria for financing to cover the fiscal cost.”
Moreover, the EIU warns of the adverse implications of deficit monetization and inflationary pressures on the currency. It suggests that tightening monetary policy could be a potential strategy to restore foreign investor confidence in the naira.
The report also cites Dr. Olayemi Cardoso, the CBN’s chief, who announced in February the bank’s decision to withhold further financial assistance to the federal government until outstanding obligations are settled. This move is in line with section 38 of the CBN Act (2007), which imposes limits on advances under ways and means.
In addition to these challenges, the report highlights broader risks, including social unrest, strikes, and the potential spread of terrorist activities from the North-East to Central Nigeria, which could further destabilize the economic landscape.
