The International Monetary Fund (IMF) has issued a cautionary statement regarding the potential for a significant depreciation of the official exchange rate, estimating a possible decrease of approximately 35 percent within the current year. Such a decline could result in a peak inflation rate of up to 44 percent before any corrective measures through monetary policy adjustments are able to stabilize the situation.
Yesterday, the Nigerian Naira traded at N1,542.58 per dollar in the Nigerian Foreign Exchange Market (NAFEM), and if the projected 35 percent depreciation occurs, the exchange rate would rise to N2,081 per dollar.
In its recent Post-Financing Assessment and Staff Report for February 2024, the IMF emphasized that the current monetary policy in Nigeria is insufficiently stringent to effectively curb inflation, particularly with ongoing pressures on the Naira. The report highlighted concerns over the lack of domestic production and the recent relaxation of restrictions on commodity imports, indicating a likelihood of further depreciation in the exchange rate.
The IMF also pointed out that Nigeria has experienced another adverse climate event in early 2024, following severe flooding in late 2022, which has exacerbated existing weaknesses in the agricultural sector, leading to decreased output and a surge in food prices.
According to the IMF, Nigeria would greatly benefit from the development of a comprehensive macroeconomic and growth strategy, with collaborative support from development partners. Such a strategy should encompass aggressive monetary tightening, fiscal adjustments to restore macroeconomic stability, and the implementation of climate adaptation measures.
The IMF highlighted the weakening of domestic demand due to significant declines in real incomes, anticipated stalling of investments in the oil sector due to rising costs, and production declines. The IMF further projected a potential zero growth rate for the country in 2024, with only a gradual recovery to two percent by 2028.
Additionally, the report underscored uncertainties regarding Nigeria’s net international reserves level, as well as potential risks posed by exogenous shocks impacting external stability, poverty, and food insecurity.
Furthermore, the report outlined the possibility of an increase in the fiscal deficit to above six percent of GDP in 2024 and 2025, partly driven by increased transfers to address social unrest and a rise in implicit fuel subsidies.
The report also discussed scenarios where Nigeria faces challenges in accessing external financing options, leading to increased reliance on Central Bank of Nigeria (CBN) and domestic financing. Despite measures such as phasing out implicit fuel subsidies, the debt-to-GDP ratio is still projected to rise by six percentage points above the baseline by 2028.
In conclusion, while Nigeria may be able to repay its obligations to the IMF even in adverse scenarios, it would face significant trade-offs, particularly regarding the allocation of resources between debt service obligations and urgent humanitarian needs to address rising poverty and food insecurity.
