Fitch, an International rating agency, says though the Central Bank of Nigeria continues to intervene to support the Naira exchange rate, the currency will still weaken from a spot rate of N412.75/$ to N416.00/$ by the end of 2022.
According to the agency, despite the upsurge in foreign reserves, the Naira will weaken further – to an average of N428.00/$ – in 2022 as dollar demand continues to rise on the back of the strengthening economic recovery.
However, “we expect Nigeria’s international reserves to continue to improve in the coming quarters, thus bolstering the CBN’s ability to manage the pace of currency depreciation.
“At Fitch Solutions, we expect that the Central Bank of Nigeria will seek to maintain the current value of the managed naira exchange rate until the end of 2021, after it implemented a devaluation in May 2021 that saw the currency fall from N380.00/$ on May 11 to N408.16/ $ on May 12.
“The devaluation involved the adoption of the weaker exchange rate for investors and exporters (known as the Nafex) as the new official rate.
“Since then, the naira has fallen slightly to a spot of N412.75/$, weakening by a total of 8.4 per cent in the year to date.
“While we previously expected that the CBN would implement a substantial further devaluation to N437.10/$ by the end of 2021, we now forecast that the currency will depreciate moderately to N416.00/$.
“The revision reflects our expectation of a significant improvement in Nigeria’s foreign reserves in the coming months. Weakening reserves have in the past pointed to imminent devaluations by the CBN,” the agency said
According to the report, Reserves rapidly declined from $36.4 billion in January to $33.3 billion in July, owing to steadily rising imports (due to the slow economic recovery) and weak oil output (88.7 per cent of export earnings in 2020).
However, the IMF approved a new allotment of Special Drawing Rights in late August, with Nigeria receiving USD3.4 billion (SDRs are special reserve assets issued by the IMF and pegged to a basket of major currencies; they are held at central banks as reserves).
In late September, Nigeria issued a $4.0 billion eurobond as International reserves are expected to rise rapidly in September as a result of this and the SDR allocation.
“We have revised up our year-end prediction from 4.1 months of import cover to 5.1 months (or USD41.6 billion), bolstering the CBN’s ability to sustain the naira in the short term,” Fitch added.
The gross external reserves stood at $41.41 billion as at November 18, 2021, compared with $41.34 billion in October 2021, a moderate increase of 0.17 per cent.