In a recent report, the Economist Intelligence Unit (EIU) emphasized the urgent need for foreign borrowing to bolster the Central Bank of Nigeria’s liquidity and address its outstanding foreign exchange obligations. The report, released on Friday, highlights the current challenges facing the Nigerian economy, particularly regarding the stability of the naira.
Since the CBN unified segments of the country’s foreign exchange market in June 2023, the naira has experienced significant depreciation, declining by 36.56% to 632.77/$ on the day of the unification. Subsequent measures, including a second devaluation in February, have further weakened the naira, making it the world’s second-worst-performing currency.
The EIU suggests that foreign borrowing is necessary to rebuild the CBN’s buffers, clear a backlog of unmet foreign exchange orders, and restore investor confidence. The report outlines various avenues for foreign borrowing, including loans secured against oil revenue and tapping into international capital markets.
However, the EIU warns of continued volatility in the naira’s value, leading to regulatory uncertainty that could impact businesses, particularly those with foreign currency holdings. The report underscores the CBN’s limited liquidity, with a significant portion of its foreign reserves tied up in derivative deals.
Regarding the Federal Government’s borrowing practices, the report notes the return of fuel subsidy and its implications. It highlights the National Assembly’s approval of the securitization of outstanding debit balances, underscoring the challenges posed by deficit monetization and high inflation on the currency’s stability.
The EIU expresses concern about the pace of market reforms initiated by President Bola Tinubu, cautioning against hasty implementation that could exacerbate economic hardships and trigger mass protests. It predicts a peak in the Monetary Policy Rate and continued inflationary pressure, driven by the hefty devaluation of the naira.
Despite these challenges, the report identifies potential mitigating factors, such as higher crude oil output and earlier-than-expected production from the Dangote refinery. However, uncertainties remain regarding the profitability of fuel imports and the refinery’s impact on domestic fuel prices.
In conclusion, the EIU underscores the delicate balance between implementing market reforms and managing socio-economic stability, urging cautious and well-calibrated policy measures to navigate Nigeria’s economic challenges.
