The International Monetary Fund (IMF) has sent out a warning that the exchange rate of the Naira may further depreciate by about 35 percent this year, adding that this could lead to inflation rate peaking at 44 percent before the monetary policy tightening could bring the situation under control.
IMF made this disclosure in its February 2024 Post–Financing Assessment and Staff Report, noting that the nation’s monetary policy is currently insufficiently tightened to bring inflation below 20 per cent while pressures on the Naira persist.
The report which was obtained by Africa Today News, New York pointed out that amid the absence of local production and the recent liberalisation of commodity imports, the exchange rate would likely depreciate further.
According to the IMF, Nigeria experienced significant floods in late 2022 and another unfavourable climate shock in early 2024. This aggravated the country’s current agricultural vulnerability and caused a drop in output and an increase in food costs.
The Bretton Woods Institution asserts that the nation would gain from working with development partners to create a comprehensive macroeconomic and growth strategy.
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This, it said, would include aggressive monetary tightening, fiscal adjustment to restore macroeconomic stability, and putting in place climate adaptation measures.
It stressed that domestic demand had weakened due to the steep fall in real incomes – as investments in the oil sector would likely stall due to rising costs, and production declines.
The fund further predicted that the country’s growth could fall to zero in 2024 and only slowly recover to two percent in 2028.
IMF said the uncertainty over Nigeria’s net international reserves level poses additional risks, as would exogenous further shocks that impact external stability, poverty, and food insecurity.
The publication further stated that the fiscal deficit could increase above six percent of GDP in 2024 and 2025, driven in part by increased transfers to quell social unrest (one per cent of GDP) and a rise in the implicit fuel subsidy.
“With limited external financing options and higher expenditures, there is increasing use of CBN and domestic financing. The authorities implement expenditure measures in 2026, for example, phasing out the implicit fuel subsidy but the debt to GDP ratio still rises by six percentage points above the baseline by 2028.
The report stated: “The spike in inflation and rise in uncertainty trigger portfolio outflows, and Nigeria is unable to access Eurobond financing. Reserves decline to $17 billion in 2025. Obligations due under the RFI peak at over eight per cent of officially reported reserves.
“Nigeria would be able to repay the fund, even in the downside scenario. This assumes that the authorities continue to prioritise external debt service. However, debt service would compete directly with urgent humanitarian needs to tackle rising poverty and food insecurity that would need to be prioritised.
“Therefore, even assuming the authorities reserve the remaining SDR allocation for RFI repayments, trade-offs could be severe.”
The uncertainty over Nigeria’s net international reserves level poses additional risks, as would exogenous further shocks that impact external stability, poverty, and food insecurity.