Nigerian naira (USD/NGN): currency on edge ahead of another hike

The Nigerian naira remained on edge on Tuesday morning as investors waited for the upcoming interest rate decision by the country’s central bank. The official USD/NGN exchange rate stood at ~800, a few points below the year-to-date high of 820. On the other hand, the black market rate has surged to a record high as the spread between the two widens.

The Nigerian central bank will conclude its meeting on Tuesday and deliver another interest rate hike in a bid to fight the soaring inflation. This meeting comes at a difficult time for Nigeria’s economy.

The Nigerian currency has plunged while inflation has surged to a record high. Data shows that the official exchange rate against the dollar started the year at 450. This means that Nigerians with naira savings have seen the value of their holdings tumble. The depreciating naira has also led to an indirect salary cut while inflation has led to an indirect tax.

Nigeria’s inflation has jumped. The most recent data showed that inflation has moved to above 20%. And this could worsen after the main oil and gas company boosted prices by 16% as I wrote here. In a report, Fitch warned that Nigeria’s inflation will average 25.1% this year. It said:

“These reforms will exert significant upward pressure on consumer prices in H2, 2023, with inflation set to average 25.1 per cent in 2023, the highest annual rate since the 1990s. This will further erode consumers’ purchasing power, clouding the outlook for private consumption.”

Nigerians have also seen the cost of borrowing accelerate. Interest rates jumped from 11.50% in March 2022 to 18.50%. Analysts believe that the bank will deliver another 50 basis point rate hike in its attempt to save the crashing naira.

The measures implemented by the Nigerian government will be positive in the long term. For example, letting the Nigerian naira free float will encourage international companies to the biggest economy in Africa. At the same time, ending oil subsidies will help to keep the country’s debt in check.

In the short term, however, we believe that the USD/NGN exchange rate will continue soaring as the Nigerian naira plunges. The official rate could crash to 900 in the coming months.