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An international credit rating agency, Fitch Ratings, has forecast(ed) that the Nigerian currency, the naira, will reach a value of 1,450 against the United States dollar by the end of the year.
This projection was made by Gaimin Nonyane, the Director of Sovereigns at Fitch Ratings, during a recent webinar focused on Nigeria and Egypt.
In May, Fitch Ratings upgraded Nigeria's Long-Term Foreign-Currency Issuer Default Rating to Positive from Stable, maintaining the IDR at ‘B-’, citing reforms in the foreign exchange market, oil industry, and monetary policy over the past year.
Nonyane commented on the naira's performance since it was floated in June 2023, stating that it is still in a phase of price discovery and is expected to experience volatility in the near term.
However, Nonyane also mentioned the anticipation of multilateral donor funding and improved oil receipts in Q3 of this year, which should help reduce volatility.
Nonyane said: "We anticipate an average exchange rate of about 1200 Naira per dollar this year, with an expected year-end rate of around N1,450 per dollar.
"Looking ahead to next year, we expect a gradual depreciation, although this is subject to the momentum of foreign exchange reforms. This is our baseline scenario assuming the current pace of momentum continues."
Regarding the likelihood of Nigeria being upgraded further, Nonyane stated, "At present, we foresee a path towards a sustainable recovery in the CBN's foreign exchange position, as well as sustained current account surpluses.
"Although there have been some surpluses, the current account surplus is currently low, at less than one percent of the GDP.
Additionally, a sustained reduction in inflation and greater stability in the foreign exchange markets, along with an increase in tax revenue, particularly from domestic non-oil sources, are all factors that could potentially lead to an upgrade.
"The low tax revenue base has contributed to the government's high interest-to-revenue ratio, which currently stands at 38 percent. This is significantly higher than the B rating median and is an important consideration for our ratings."
The director at Fitch Ratings mentioned that they anticipate a recovery in the oil sector to bolster the current account in the short term, stating that they also foresee an increase in oil refining capacity as the Dangote plant ramps up, with expectations for PMS to come online later this year or early next year, reducing transport costs and refined oil imports, thereby alleviating foreign exchange demands.
Regarding Nigeria's foreign reserves, he noted that gross foreign exchange reserves had decreased from their peak in March to around $32.7bn, with recent gains from oil receipts offset by debt repayments.
The outlook projects a modest rise in foreign exchange reserves by year-end due to a recovery in oil receipts, multilateral funding, and potential commercial borrowing, which would still align with a B-medium outlook.
However, the reliance on bank swaps for over 30% of the gross reserves poses an external risk, despite expectations for most swaps to be rolled over to navigate external debt servicing challenges.
She noted that external debt servicing is expected to increase by $4.8bn in 2024 and a further $5.2bn in 2025, including amortization and the $1.1bn Eurobond due in November 2025. Sustaining foreign exchange momentum is crucial in light of these projections.
During an appearance on the programme Sunday Politics on Channels Television, the Minister of Finance and Coordinating Minister of the Economy, Wale Edun, mentioned that the World Bank was expected to consider a $2.25bn funding package for Nigeria in the next two weeks.
He described the funding as virtually free or almost grant funding with very low interest rates not tied to conditionalities, noting that the majority of the funding, $1.5bn, was designated as Development Policy Operation, acknowledging Nigeria's efforts to stabilize the economy and promote growth.
It is anticipated that at least half of the funding will be disbursed shortly after the board meeting.
