Global rating agency, Fitch, has projected that Nigeria’s foreign reserves will rise to $42 billion by the end of 2021 from $36.30 billion by January 14 this year.
In a report titled, “Depreciatory Pressures on Key Sub-Saharan African Currencies to Lessen,’ the credit rating agency said it expects Brent crude to average $53 per barrel, compared to the $43.1 per barrel recorded in 2020, helping the country to accrue more dollar reserves.
Fitch also projected further devaluation of the local currency by the Central Bank of Nigeria despite the possible rise in forex buffer and improvement in the balance of payment.
Fitch’s report read, “The naira lost 8.2 percent of its value against the dollar in 2020, and we expect the CBN to allow the official naira exchange rate to depreciate further over the course of 2021, notwithstanding improved terms of trade and foreign exchange reserves.
“Given rising oil prices in 2021, we expect forex reserves to rise to an average of $42 billion in 2021 (around eight months of import cover), compared to $36 billion in 2020. “However, this will not negate the impact of persistent depreciatory pressures on the naira, notably as a result of rising dollar demand driven by the domestic economic recovery.”
The rating agency also said World Bank could exert more pressure on the country to align its exchange rate and unified and flexible” exchange rate regime.
It said, “While we continue to think that a free float is unlikely given its probable impact on already high inflation, we forecast that inflation will rise to 14.6 percent in 2021, compared to an average of 13.2 percent in 2020.
“It is likely that the CBN will seek to at least partially yield to World Bank pressure and weaken the official naira rate further to mitigate the growing gaps between the official naira rate and market-determined exchange rates, including the parallel market rate.”
Nigeria’s headline inflation released this week showed that the index rose to 15.75 percent in December 2020 from 14.89 percent in the previous month.
“We consequently expect the naira to weaken further, ending the year at N438/$ (10.1 percent below end-2020 levels) and averaging N408.50 (7.2 percent below the 2020 average),” Fitch added.