A recent report from the Economist Intelligence Unit (EIU) projects a significant weakening of Nigeria’s official exchange rate to N1,068.3 per US dollar by 2025. The forecast anticipates ongoing currency losses, attributing them to the substantial size of the parallel market and the country’s low foreign exchange reserves.
The report emphasizes a widening gap between official and parallel-market exchange rates, prompting a front-loaded devaluation in 2025 to address the disparity. The revised average exchange-rate forecast for the year is now N1,068.3:US$1, reflecting the EIU’s expectation of an attempt at exchange-rate convergence and a larger correction.
Nigeria has been grappling with forex scarcity, hindering efforts to clear its forex backlog and adversely affecting its currency’s value. President Bola Tinubu has committed to settling approximately $7 billion in unpaid forex commitments to banks, signaling efforts to alleviate the forex scarcity.
Despite the Central Bank of Nigeria’s (CBN) attempts to clear the forex backlog, challenges persist, impacting investor confidence. Foreign airlines reveal that about 90% of their trapped funds, totaling $783 million, remain unpaid.
The EIU report highlights a 35% spread between official and parallel-market exchange rates, reflecting the CBN’s reluctance to allow free access to hard currency, leading to illiquidity in the Nigerian Foreign Exchange Market (NFEM). The report suggests that pressing for currency reform may necessitate a substantial devaluation, posing challenges to the fragile fiscal position.
Concerns about Nigeria’s forex illiquidity include the lack of willingness to implement orthodox monetary policy and the CBN’s perceived lack of firepower. The EIU suggests that a currency float may not succeed, given the CBN’s inability to adequately supply the market or clear a backlog of foreign exchange orders.
The report predicts sizable devaluations in 2025, causing a 38.5% loss against the US dollar, with the exchange rate projected at N1,142.5:US$1 by the end of the year. However, it does not expect a lasting commitment to a market-led naira, foreseeing an unstable exchange-rate regime and periodic devaluations, with a projected rate of N1,262.1:US$1 at the end of 2028.
