IMF Forecast: Naira Expected to Depreciate by 35% in 2022

The International Monetary Fund (IMF) has warned that the exchange rate of the Naira will further depreciate by about 35 percent this year, stating that this could lead to a 44 percent inflation rate before the monetary policy tightening can bring the situation under control.

In its February 2024 Post-Financing Assessment and Staff Report, the IMF noted that Nigeria’s monetary policy is currently insufficiently tightened to bring inflation below 20% and pressures on the naira persist.

In the IMF report, it is noted that the exchange rate is likely to depreciate further because of the absence of local production and the recent liberalisation of commodity imports.

In addition to the uncertainty about Nigeria’s net international reserves level, further shocks that impact poverty, food security, and external stability pose additional risks, according to the IMF.

According to the publication, the fiscal deficit will rise to over six percent of GDP in 2024 and 2025, mainly as a result of increased transfers to quell social unrest (one percent of GDP) and an increase in implicit fuel subsidies.

“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 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.”