An International business research firm, Economist Intelligence Unit, has highlighted in its latest Report on Nigeria, published on Friday, that the Central Bank of Nigeria lacks the liquidity to support the naira.
The Central Bank of Nigeria unified segments of the country’s foreign exchange market on June 14, 2023, leading to a significant depreciation of the local currency, weakening it by 36.56% to 632.77/$ from 463.38/$ at the official market.
The naira has been facing challenges against the dollar since then, and it worsened in February following a second devaluation of around 45%, as estimated by analysts, in an effort to narrow the difference with the parallel market rate, positioning it as the second-worst-performing currency globally, after the Lebanese pound.
The EIU stated in the report that the CBN might have to consider foreign borrowing to support the naira and meet its foreign exchange commitments.
It is anticipated that foreign loans will be necessary to rebuild the CBN's buffers, fully clear a backlog of unmet foreign exchange orders, and restore confidence. This target may only be reached by the end of 2024.
In mid-January, Nigeria secured a $3.3bn loan from the African Export-Import Bank, backed by oil revenue in a crude oil prepayment facility, following a $1bn loan from the African Development Bank in November, the search is on for another $1.5bn from the World Bank.
The report continued, “The CBN lacks the liquidity to support the naira itself; out of $33bn in foreign reserves, a large share (estimated at nearly $20bn), is committed to various derivative deals. The CBN recently imposed restrictions on oil companies repatriating export earnings abroad, and there is a risk of wider convertibility limits being imposed until the currency stabilises.”
Also, following the return of fuel subsidy, it was revealed that the Federal Government was greatly incentivised to borrow from the CBN.
EIU stated in the report that the FG had a strong reason to borrow from the apex bank due to the return of a larger fuel subsidy than before.
In December 2023, the securitisation of the outstanding debit balance of N7.3tn of the ways and means advance in the consolidated revenue fund of the Federal Government was approved by the National Assembly. Through Ways and Means, the CBN provides a loan facility to finance the Federal Government’s budget shortfalls.
