Prospects for the Naira in 2016

Prospects for the Naira in 2016

The naira faces a host of challenges in 2016, including mounting pressure from the international finance community to devalue the country’s currency in the face of the global oil crisis. Nigeria’s government appears determined to defend the currency, with president Muhammadu Buhari maintaining that he will protect the naira from devaluation and thus safeguard Nigeria’s poor and middle classes from further hardship caused by ever-rising costs of imported goods. At the end of 2015, the president reinforced his position that he would not support devaluation unless he can be convinced that “devaluation of the naira is what Nigeria needs.”

Since popular public opinion is that a weaker currency indicates lack of economic performance, Buhari is unlikely to allow devaluation anytime soon, if he wishes to protect his political prospects. Because of this, the naira is not expected to weaken too much in 2016. In support of Buhari’s stance on maintaining a stable naira, the Central Bank’s governor, Godwin Emefiele, is implementing foreign currency controls and limiting imports in order to protect against devaluation, as well as encourage domestic production (the Economist 2016). However, analysts have predicted that in twelve months, we may expect to see some inevitable devaluation occurring as a result of international economic pressure.

Forex earnings in 2015 declined or remained flat, due to the weakening of the naira last year, in combination with shortfalls in local productive sectors. The Central Bank of Nigeria (CBN) devalued the naira from N155 to N168 against the US Dollar, and then again to N198 against the dollar in early 2015. At the time of writing, the naira sits at 198.89 to the dollar. This year, the CBN aims to carefully manage Forex demand in order to help keep the naira stable.

An analyst at Investec in South Africa, Chris Becker, has been quoted as saying the naira’s prospects will depend on Nigeria’s fiscal policy in 2016, which proposes to increase expenditure and borrowing. Bloomberg and the Economist have reported that interbank rates should increase to 250 if domestic demand for imports and dollars increases, as it is expected to (Wallace 2015).  Nigeria’s vice president, Yemi Osinbajo, has mentioned increased spending in order to avoid recession, including on infrastructure. The budget deficit is also expected to double this year (Wallace 2015). With the country’s budget reaching a record high in 2016 and the continuing hardship caused by plunging oil prices, Buhari may find it difficult to tough out a full year without allowing some devaluation to happen.

Despite calls from the international community for some flexibility on Nigeria’s currency value, Forex trade will be tightly regulated this year. Low oil prices will continue to put pressure on the country’s economy, and Buhari may well decide that a weaker naira is in fact what Nigeria needs. Allowing this to happen may help absorb the shock of declining oil revenue to Nigeria’s financial health, and may indeed help stimulate domestic production (Winsor 2016). In spite of Nigeria’s many fiscal challenges this year, Buhari’s weathering of previous economic woes and his willingness to carefully weigh advice may see him becoming more flexible throughout 2016; this could translate into a gradual, responsible devaluation of the naira and potentially a save for the economy.

Sources:

Unknown author. “Hope the naira falls.” The Economist. 30 January 2016. Accessed 11 February 2016.

Wallace, Paul. “Analysts Say Expansionary Fiscal Policy Is Key to Nigeria’s Naira Outlook in 2016.” Naija247 News. 20 December 2015. Web. Accessed 10 February 2016.

Wallace, Paul. “Budget Blowout Risks Breaking Through Nigeria’s Naira Defenses.” Bloomberg Business. 15 December 2015. Accessed 10 February 2016.

Winsor, Morgan. “Amid Low Oil Prices, Will Nigeria Devalue Naira Currency? IMF, Buhari Meet Over Economic Crisis.” International Business Times. 5 January 2016. Accessed 10 February 2016.

My name is Robert Okeke and I am the thoughts and opinions behind this website. A number of years ago, I started reading about the economy here in Nigeria and the impact the world economy has on the way our currency and commodity prices change over time. I have always had an interest in statistics and mathematics, so this was a very appealing area for me to study.