- A new prediction has emerged for the naira, and it is N115.35 higher than Q1 2024 figures
- According to Stears Business, naira will exchange for N1,415/$ at the end of the second quarter
- The reasons cited include an uncertain policy environment and lingering fiscal-monetary policy dissonance
Stears, a market intelligence company for investing in Africa, has predicted that volatility in the foreign exchange (FX) market, coupled with inflationary pressure, will push the Naira to trade at N1,415.78 to the dollar by the end of the second quarter (Q2 2024).
It said its prediction, which is N115.35/$ higher than the amount the naira traded in the first quarter (Q1) 2024, indicates ongoing risks for investors. It added that Nigeria’s macroeconomic landscape will be characterised by lingering inflationary pressures, heightened currency risk, sluggish GDP growth, and low consumption as disposable income shrinks.
The African market macro insight and analytics company stated this in its Africa economic outlook for June 2024, released on Monday, June 3.
It said, “We expect the naira to keep oscillating between N1,300 - N1,500 against the US dollar at the official and parallel markets in June.”
Stears further noted that the economies of African countries like Nigeria, South Africa, Egypt, Ghana and Kenya will face multiple challenges in June, “marked by heightened inflation risks, renewed currency pressures, external sector vulnerabilities from lingering geopolitical tensions and political stability concerns due to elections. Election spending and its impact on money supply-induced inflation will only be part of the complex inflation puzzle (heavily driven by food and energy).”
How CBN’s interventions, FX volatility impacted value of naira
The Naira witnessed market volatilities at both the official and parallel (black) FX markets in May as it reduced by 8.56 per cent between May 2 and 16 at the official market.
On May 28, days after the Monetary Policy Committee (MPC) meeting, held on May 20 and 21, the local currency gained by 30.68 per cent, widening the gap between official and parallel market rates by 29.06 per cent. This was majorly driven by a double increase in FX turnover, which signalled a rise in transactions.
The naira, however, closed the month at N1,485.75/$, having depreciated by 20.94 per cent. “Lingering dollar illiquidity, speculation and bearish investor sentiment due to policy uncertainty drive these currency swings,” said Stears.
With the volatile nature of the Naira’s trading in May amid the decision to resume sale of dollars to Bureau De Change (BDC) operators and a directive from the Central Bank of Nigeria (CBN) in this regard, Stears noted that “This re-licensing regulation surprised the markets, triggering an adverse initial reaction that led to the Naira’s steady depreciation in the parallel market. Bearish market sentiments and reduced dollar supply amid buoyant demand exerted additional pressure on the parallel market rate.”
Increasing inflation and interest rates will lead to higher commodity prices
On inflation and interest rate, Stears noted that exchange rate movements will keep commodity prices high in the near term, heightening inflationary pressures.
It also forecast that May 2024 headline inflation would be within its base and bear scenario of 33.35 and 36.21 per cent compared to April 2024 numbers of 33.69 per cent, primarily driven by food and energy prices.
The MPC had increased the interest rate by 150 basis points to 26.25 per cent in an effort to curb inflationary pressures, anchor inflation expectations, and support the currency. The rate increase, however, didn’t impact the Treasury bill (T-bill) rates, as the T-bills remained at 16.50 per cent, 17.44 per cent and 20.69 per cent for the three, six and 12-month tenors, respectively.
In response to the market movements, Stears said, “While we expect this trend to change in the coming month as the CBN strengthens the monetary policy transmission mechanism by mopping up excess money market liquidity, investor sentiments are to remain bearish.
This is because of Nigeria’s highly uncertain policy environment and lingering fiscal-monetary policy dissonance.
In its words, “Escalating food prices primarily drives inflation in Nigeria due to insecurity and high post-harvest losses, a problem that is more structural than monetary. Higher interest rates will not fix this problem, as it rests within the purview of fiscal authorities.
“Worryingly, we are yet to see significant improvements in fiscal policy measures to address these structural issues and effectively complement the contractionary monetary policy stance to bolster investor confidence and support output.
“In June, Nigeria’s macroeconomic landscape will be characterised by lingering inflationary pressures, heightened currency risk, sluggish GDP growth and low consumption as disposable income shrinks," it added.
