The International Monetary Fund (IMF) has cautioned that Nigeria’s exchange rate might experience an additional 35 per cent depreciation this year.
The bank disclosed this in its February 2024 Post–Financing Assessment and Staff Report.
According to the report, this could lead to a massive surge in inflation, reaching a peak of 44 per cent, before the monetary policy can effectively address the situation through tightening measures.
The IMF stressed that the current level of monetary policy tightening is not adequate to reduce inflation to below 20 per cent. Moreover, pressures on the Naira continue to persist.
On Tuesday, the Nigerian naira experienced further depreciation, reaching N1,900 to the dollar in the parallel foreign exchange market. However, it recovered to N1,551.24 per dollar at the Nigerian Autonomous Foreign Exchange Market (NAFEM). The Nigerian government recently revealed plans to address the currency challenges by seeking $10 billion in funding to boost liquidity in the foreign exchange market.
The report observed that due to the absence of local production and the recent liberalization of commodity imports, the exchange rate is expected to undergo further depreciation.
Monetary policy is tightened insufficiently to bring down inflation below 20% and pressures on the naira persist. In addition, Nigeria was hit by another adverse climate shock in early 2024 (following severe flooding in late 2022) that exacerbated the current weakness in agriculture and led to a decline in output and a surge in food prices,”
“Given the absence of local production and the recent liberalization of commodity imports, the exchange rate would likely depreciate further—by an estimated 35% in 2024—and contribute to a further sharp rise in inflation, peaking at 44%, before monetary policy is eventually tightened sharply.”
The Bretton Woods institution suggests that the country would gain from formulating a comprehensive macroeconomic and growth strategy, in collaboration and with support from development partners.
Even with these challenges, the IMF is optimistic that Nigeria will fulfil its repayment obligations to the Fund, provided there is a continued focus on servicing external debt.
“Nigeria would be able to repay the fund, even in the downside scenario. This assumes that the authorities continue to prioritise external debt service. However, debt service would compete directly with urgent humanitarian needs to tackle rising poverty and food insecurity which would need to be prioritised,” it said.
The fund further predicted that the country’s growth could fall to zero in 2024 and only slowly recover to two per cent in 2028.
