The Economic Intelligence Unit (EIU) recently released an analysis of Nigeria’s economic situation, particularly focusing on the challenges faced by the Central Bank of Nigeria (CBN) in stabilizing the local currency, the naira. According to the EIU, the CBN is unable to effectively control the depreciation of the naira, which has been experiencing rapid decline.
Central Bank of Nigeria faces criticism over the naira
This volatility in the exchange rate is expected to lead to unpredictable regulatory measures, posing significant challenges for businesses that rely on foreign exchange. One of the key factors contributing to the instability of the naira is the limited capacity of the CBN to intervene in the foreign exchange market.
Despite having an estimated $33 billion in foreign reserves, a substantial portion, around $20 billion, is tied up in derivative deals, leaving the CBN with only $13 billion to defend the currency. This constrained reserve position severely limits the CBN’s ability to support the naira against further depreciation. The depreciation of the naira has been exacerbated by the CBN’s decision to abandon the fixed exchange rate regime, allowing the currency to float freely against the U.S. dollar.
Since this policy shift in June 2023, the naira has experienced a significant decline in value, trading at just over NGN1,600 per USD1, compared to under NGN500 per dollar previously. Additionally, the Nigerian government has eliminated the longstanding petrol subsidy, further contributing to economic uncertainty.
Managing fuel subsidy amid economic pressures
Despite the government’s hopes that these policy changes would attract foreign direct investment, they have led to widespread suffering among the population. The abrupt removal of the petrol subsidy has particularly affected citizens, as Nigeria relies heavily on fuel imports, resulting in sharp increases in pump prices.
In response to mounting pressure, the EIU suggests that the government has quietly reinstated the subsidy to mitigate public discontent. Despite the significant devaluation of the naira, with a 45% drop in February 2024 alone, there has been little adjustment in fuel prices. This indicates the covert reintroduction of the subsidy, underscoring the government’s struggle to manage economic challenges while avoiding social unrest.
Looking ahead, the EIU anticipates further challenges for Nigeria’s economy, particularly in the oil sector. Foreign oil companies, which have long operated in Nigeria, are expected to divest from onshore assets, potentially impacting crude oil production. However, despite this divestment, Nigeria’s crude oil production is projected to increase from 1.23 million barrels per day (mbpd) in 2023 to 1.48 mbpd, indicating resilience in the face of industry changes.
Nigeria faces significant economic challenges, particularly with regard to the depreciation of the naira and the management of fuel subsidies. The government’s policy decisions have led to increased volatility in the exchange rate and heightened economic uncertainty, impacting businesses and the general population alike. Moving forward, addressing these challenges will require careful economic management and strategic interventions to stabilize the currency and promote sustainable growth.
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