Nigerian naira outlook: currency faces short-term headwinds

The Nigerian naira has moved sideways in the past few weeks even as the country’s economic situation worsened. The USD/NGN exchange rate was trading at 799.50 on Wednesday. Data by NGNRates show that some traders are quoting the rate at 830. 

Nigerian inflation to worsen

Nigeria is going through one of its worst economic crisis in modern times. Data published this week revealed that inflation surged to 22.7% in June as food prices surged. The cost of food rose by 25.3% during the month, forcing the government to declare an emergency.

Nigeria’s inflation has been exacerbated by the actions of the new government. Its first action was to remove the petrol subsidies that cost the government as much as $10 billion every year. It then democratized the industry by allowing other traders to import oil.

The government then removed a peg that existed on the Nigerian naira, leading to a currency devaluation. As a result, most foreign companies, including PZ Cussons, warned about a hit to their Nigerian results.

The situation in Nigeria could worsen in the coming months. In a statement this week, the Nigeria National Petroleum company said that it will hike petrol prices by a whopping 15%. A liter is now going for about 637 naira, up from the previous 537 naira. 

Headline Inflation for June 2023 was 22.79% from 22.41% in May 2023.
Food Inflation was 25.25% in June 2023 from 24.82% in May 2023.
Urban Inflation was 24.33%, rural Inflation was 21.37%.
Read the full inflation report for June 2023 here: https://t.co/BpKpcaFWBA pic.twitter.com/cJIdkZe2Fk

— NBS Nigeria (@NBS_Nigeria) July 17, 2023

Impact of these actions on Nigeria’s naira

USD/NGN chart

Analysts have mixed opinions about the Nigerian economy. Some believe that these actions will have short-term negative impacts on the economy. They cite Kenya, where the economy has descended into chaos after the government removed oil subsidies in 2022.

In the long term, however, these actions will have a positive impact on the economy. For example, by removing oil subsidies and opening up the energy market, Nigeria will save billions of dollars every year. It will also slow the expansion of the country’s debt. The most recent data showed that Nigeria spends 96% of its revenue on debt repayments.

Another long-term impact is that many foreign investors will be willing to allocate funds to Nigeria. By abandoning the currency peg, we could see some more foreign currencies inflows to the country.

Therefore, the Nigerian naira could see some short-term volatility and weakness and then rebound in the long term. In this case, the Naira could slip to 815 against the US dollar in the near term and then retreat in 2024.