Nigeria’s naira/US$ exchange rate was relatively stable in the second half (H2) of 2021, driven by improved external reserves, according to a new report by FSDH Research.
The issuance of the Eurobond and drawings from the International Monetary Fund’s (IMF) Special Drawings Right (SDR) in late 2021 improved external reserves position in the third quarter (Q3), thereby resulting in stable rates in the Investors and Exporters (I&E) window.
However, external reserves have since been under pressure following limited investment inflows and high dollar demand to finance imports and services.
Nigeria’s external reserves, which peaked at $41.8 billion on October 29, 2021, have fallen consistently to $40.7 billion on December 17. This represents a decline of 2.8 percent during the period. Going into 2022, the report states this trend of declining reserves is expected to continue.
According to the report, pre-election periods in Nigeria are often associated with heightened uncertainty. “In view of this, as well as the insecurity situation, we believe that investors will be cautious and Nigeria could experience limited foreign exchange inflows during this period,” according to analysts at FSDH Research.
On the demand side, the report says imports will continue to trend upwards, likewise the demand for foreign exchange to finance services – school fees, medical tourism, among others. A combination of these factors will exert pressures on external reserves and exchange rate in the second half of 2022, causing depreciation.
The extent of depreciation, will however, be determined by inflow from the sale of crude oil, which is influenced by crude oil price and output.
“In our moderate case scenario where we assume an average oil price of $55 per barrel and a production of 1.6 million barrels per day for Nigeria, we estimate that the naira will settle at N430 per US$ towards the end of 2022,” the report states.
The naira depreciated on the Investors and Exporters (I&E) window by 4.1 percent to N410/$ in the first quarter of 2021 from N394/$ in the previous quarter.
In May, the CBN adopted the I&E window rate as the official exchange rate. As a result, the performance of the naira on the I&E window showed some stability. However, reserves continued to decline.
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As of December 20, the exchange rate on the I&E window stood at N414.80/$. This represents a 5.32-percent depreciation in 2021 (ytd).
Improving reserves conditions following the huge external inflows from borrowings will stabilise rates in the short term. However, higher importation of goods and foreign exchange demand to finance services will continue to add pressure on reserves.
In addition, lower investment inflows following a challenged business environment could trigger depreciation in the exchange rate in 2022, note the analysts at FSDH Research.
