The Economic Intelligence Unit’s Analysis of Nigeria’s Economic Challenges: A Focus on the Central Bank of Nigeria and the Naira

The Economic Intelligence Unit (EIU) has recently released an in-depth analysis of Nigeria’s economic situation, with a specific focus on the challenges faced by the Central Bank of Nigeria (CBN) in stabilizing the local currency, the naira. According to the EIU report, the CBN is grappling with significant difficulties in effectively controlling the depreciation of the naira.

The Central Bank of Nigeria under Pressure: Managing the Instability of the Naira

This volatility in the exchange rate is predicted to lead to unpredictable regulatory measures, creating substantial challenges for businesses that rely on foreign exchange. A primary factor contributing to the instability of the naira is the limited capacity of the CBN to intervene in the foreign exchange market.

Despite possessing an estimated $33 billion in foreign reserves, a considerable portion, roughly $20 billion, is allocated to derivative deals. This leaves the CBN with only $13 billion to defend the currency. The severely constrained reserve position significantly limits the CBN’s ability to support the naira against further depreciation.

The depreciation of the naira has been accelerated by the CBN’s decision to abandon the fixed exchange rate regime, allowing the currency to float freely against the U.S. dollar. Since this policy shift in June 2023, the naira has undergone a significant decline in value, trading at over NGN1,600 per USD1, compared to under NGN500 per dollar previously.

Additionally, the Nigerian government’s decision to eliminate the longstanding petrol subsidy has further contributed to economic uncertainty. The abrupt removal of the subsidy has led to sharp increases in pump prices, affecting citizens significantly as Nigeria is heavily reliant on fuel imports.

Managing Fuel Subsidy Amid Economic Pressures: A Balancing Act

Despite the government’s hopes that these policy changes would attract foreign direct investment, they have resulted in widespread suffering among the population. The sudden elimination of the petrol subsidy has particularly impacted citizens, leading to public discontent. In response to this pressure, there have been reports that the government has quietly reinstated the subsidy to some extent, although official confirmation is yet to be obtained.

Despite the significant devaluation of the naira – with a 45% drop in February 2024 alone – there have been little adjustments in fuel prices. This implies that the subsidy has been covertly reinstated, highlighting the government’s challenge in managing economic challenges while avoiding social unrest.

Looking ahead, the EIU anticipates further challenges for Nigeria’s economy, particularly in the oil sector. Foreign oil companies are expected to divest from onshore assets, which could impact crude oil production. However, despite this divestment, Nigeria’s crude oil production is projected to increase from 1.23 million barrels per day (mbpd) in 2023 to 1.48 mbpd, demonstrating resilience in the face of industry changes.

Navigating Economic Challenges: Stabilizing the Naira and Promoting Sustainable Growth

Nigeria faces significant economic challenges, particularly with regard to the depreciation of the naira and the management of fuel subsidies. The government’s policy decisions have led to increased volatility in the exchange rate and heightened economic uncertainty, affecting businesses and the general population alike.

Addressing these challenges will require careful economic management and strategic interventions to stabilize the currency, promote sustainable growth, and mitigate social unrest. By working closely with international financial institutions and implementing sound economic policies, Nigeria can overcome these challenges and position itself for a stronger future.