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*Warns FX may further depreciate by 35% this year
* Inflation may peak at 44%
* Says 2022 flood led to decline in output and surge in food prices
* Predicts Nigeria economic growth falls to zero in 2024 and rises to 2% in 2028
By Jon Egie
Hope for a reprieve to the economic hardship in Nigeria seems forlorn as the International Monetary Fund, IMF, has warned that the exchange rate of the Naira may further depreciate by about 35 percent this year.
The IMF caution added the naira depreciation could
lead to inflation rate peaking at 44 per cent before the monetary policy tightening could bring the situation under control.
This was disclosed in IMF’s February 2024 Post–Financing Assessment and Staff Report.
The global body which mandate is to support economic policies that promote financial stability and monetary cooperation noted that the Nigeria’s monetary policy is currently insufficiently tightened to bring inflation below 20 per cent while pressures on the Naira persist.
According to the report, in the absence of local production and the recent liberalisation of commodity imports, the exchange rate would likely depreciate further.
IMF said Nigeria had been hit by another adverse climate shock in early 2024, following severe flooding in late 2022, which exacerbated the current weakness in agriculture and led to a decline in output and a surge in food prices.
The Bretton Woods institution said the country would benefit from developing a comprehensive macroeconomic and growth strategy, in collaboration and with support from development partners.
This, it said, would include aggressive monetary tightening, fiscal adjustment to restore macroeconomic stability, and putting in place climate adaptation measures.
It stressed that domestic demand had weakened due to the steep fall in real incomes – as investments in the oil sector would likely stall due to rising costs, and production declines.
IMF further predicted that the country’s growth could fall to zero in 2024 and only slowly recover to two percent in 2028.
IMF said the uncertainty over Nigeria’s net international reserves level poses additional risks, as would exogenous further shocks that impact external stability, poverty, and food insecurity.
The publication further stated that the fiscal deficit could increase above six percent of GDP in 2024 and 2025, driven in part by increased transfers to quell social unrest (one per cent of GDP) and a rise in the implicit fuel subsidy.
“With limited external financing options and higher expenditures, there is increasing use of CBN and domestic financing. The authorities implement expenditure measures in 2026, for example, phasing out the implicit fuel subsidy but the debt to GDP ratio still rises by six percentage points above the baseline by 2028.
The report stated: “The spike in inflation and rise in uncertainty trigger portfolio outflows, and Nigeria is unable to access Eurobond financing. Reserves decline to $17 billion in 2025. Obligations due under the RFI peak at over eight per cent of officially reported reserves.
“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 that would need to be prioritised.
“Therefore, even assuming the authorities reserve the remaining SDR allocation for RFI repayments, trade-offs could be severe.
“The uncertainty over Nigeria’s net international reserves level poses additional risks, as would exogenous further shocks that impact external stability, poverty, and food insecurity.”
Credit: Vanguard
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