International business research firm, Economist Intelligence Unit, has said that the Central Bank of Nigeria does not have the liquidity to support naira as of now and that CBN may need to resort to foreign borrowing to support naira and fulfil its foreign exchange obligations.
EIU highlighted this in its recent Country Report on Nigeria, published on Friday.
Recalling that on June 14, 2023, the CBN implemented measures to unify segments of the foreign exchange market, resulting in a significant depreciation of the local currency. The naira experienced a 36.56% weakening to 632.77/$ compared to 463.38/$ at the official market.
Since then, the naira has struggled against the dollar, further exacerbated by a second devaluation in February, estimated at around 45% by analysts, aimed at closing the gap with the parallel market rate.
According to the report, the EIU suggested that the CBN may need to turn to foreign borrowing to support the naira and meet its foreign exchange obligations.
It stated, “Our view is that it will take foreign borrowing to rebuild the CBN’s buffers, fully clear a backlog of unmet foreign exchange orders and restore confidence. This is probably only achievable towards the end of 2024. In mid-January Nigeria took out a $3.3bn loan from the African Export-Import Bank, secured on oil revenue in a so-called crude oil prepayment facility. This follows a $1bn loan from the African Development Bank in November, and another $1.5bn is being sought from the World Bank.
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“Falling risk premiums on government international bonds make tapping the international capital market another viable (albeit costly) option once US interest rates start to fall from the second half of 2024.
“For most of this year, the naira will be highly volatile, leading to regulatory erraticism that can affect businesses, especially those holding foreign currency.
“The CBN lacks the liquidity to support the naira itself; out of $33bn in foreign reserves, a large share (estimated at nearly $20bn), is committed to various derivative deals. The CBN recently imposed restrictions on oil companies repatriating export earnings abroad, and there is a risk of wider convertibility limits being imposed until the currency stabilises.”
