Future of Naira gloomy, external reserves down 11% Inflation may drop, interest rate’ll rise Analysts see sluggish GDP growth, recovery depends on policy discipline

By Babajide Komolafe, Economy Editor, Emma Ujah, Peter Egwuatu, Obas Esiedesa & Elizabeth Adegbesan

The 2024 macro-economic environment is predicted to remain under pressure going by major instability recorded across key segments of the economy in 2023.

Speaking to Financial Vanguard last weekend, financial analysts and economists, however, indicated that there are chances of moderation in the various pressure points but warned that it requires a lot of discipline in policy execution to cushion the pangs of the 2023 macro-economic headwinds for a better 2024 outcome.

Meanwhile, developments in the foreign exchange market indicated that the pressure point was overwhelmingly negative in 2023, with experts hinting that recovery may be difficult in 2024.

The general picture painted by the experts indicates that the 2024 macro-economic environment is starting on a depressing note with galloping inflation which rose from 21.5% in January 2023 to 28.2% in November 2023, while the Gross Domestic Product, GDP, growth rate is falling short of expectation, ending Q3’23 with 2.54%.

Following market reforms, Naira crashed from N449.05/$1.00 in January 2023 to N802/$1.00 in December at Investors and Exporters (I&E) Window.

However, the macro-economic situation is expected to improve in the later part of 2024 as the economy readjusts to new price levels.

It is also hoped that the resumption of domestic refining of crude oil will have salutary effect on forex and petroleum products prices.

In 2024, the experts anticipate some level of normalisation around the policy reforms of the new federal regime.
The economy is expected to benefit from savings on subsidy payments and the savings on foreign exchange used to import PMS once the Dangote and Port Harcourt refineries go live. This is expected to improve the country’s foreign reserves and help strengthen the Naira.

However, they also indicated that issues around high government debt and low revenues will need to be addressed along with other structural issues in the economy to make the gains of the reforms bud well across the sectors. Overall they expect moderate improvement in GDP in 2024, as well as in the overall macroeconomic environment.

But inflation rate is forecast to remain elevated but will moderate significantly around the second quarter due to the CBN’s tight monetary policy.

However, the consequence of this development will be a high interest rate environment given higher expected monetary policy rate, according to them.

They also expect implementation of the outcome of the work of the Presidential Committee on Fiscal Policy and Tax Reforms will likely lead to an improvement in the ease of doing business as multiple taxes get streamlined.

External sector close 2023 badly, 2024 is bleak

The steady depreciation suffered by the Naira in 2023, following forex market reforms and weak dollar inflow will persist in 2024 with analysts projecting further rise in the exchange rate to N1,500 per dollar in the parallel market.

Financial Vanguard findings showed that the Naira depreciated by 102 per cent in 2023 where the exchange rate rose to N960 per dollar at the close of business on Friday from N461.5 per dollar at the end of 2022.

The Naira also depreciated by 68 per cent in the parallel market where the exchange rate rose to N1,240 per dollar in 2023 from N736 at the end of 2022.

This downward trend was driven primarily by decline in foreign exchange inflow into the economy, leading to fall in external reserves and reflected in sharp decline in turnover in NAFEM.

Foreign reserves fall 11.3%
The above reforms however failed to translate to improved foreign exchange inflow into the country, hence the downward trend in the external reserves persisted. Consequently, the external reserves fell by 11.3 per cent to $32.89 billion at the end of 2023 from $37.08 billion at the end 2022.

Turnover in NAFEM falls 18% to $34bn
Also reflecting the weak dollar inflow into the economy, the volume of dollars traded (turnover) in the Nigerian Foreign Exchange Market, NAFEM fell by 18 per cent, year on year (YoY) to $27.86 billion from $34.12 billion in 2022.

Analysis showed that NAFEM recorded the lowest turnover in the fourth quarter, Q4’23 during the year.
Data from FMDQ showed that turnover fell by 10.6 percent, quarter-on-quarter, QoQ, to $6.96 billion in Q4’23 from $7.79 billion in Q3’23. This was in sharp contrast to the 17.8 QoQ increase in turnover recorded in Q3’24 from $6.61 billion in Q2’23.

From $6.5 billion recorded in the first, Q1’23, turnover rose by 1.7 percent to $6.61 billion in Q2’23. The upward trend continued in Q3’22, when turnover increased by 17.8 percent to $7.79 billion.
The rising trend was however halted in Q4’23 when turnover fell by 10.6 percent to $6.96 billion .

Much worries over 2024 outlook.

All together though the analysts believe that the difficulties across almost all the economic segments are not insurmountable it requires much more adept moves by the government on policy implementation. They however, offered divergent views on the possible outcomes as 2024 rolls into half year.

Forex outlook
Analysts’ projections indicate that the Naira depreciation will continue in 2024 due to several factors.
“We expect the Naira to continue to trade below its fundamental value (which is usually a trade-based measure) in both the official and parallel market, as Naira trails money-based valuations,” said Ibukun Omoyeni, Sub Saharan Africa, Economist, Vetiva Capital Management Limited, adding, “Our baseline scenario sees the Naira slipping to ?950/$ in the official window, assuming no external financing, minor recoveries in oil production, and continued strain of existing encumbrances on FX reserve.

” Upside risks to our outlook include substantial inflow of $10 billion from multilateral sources, favourable global interest rate environment that could pave way for Eurobond issuances, material improvement in reserve levels as a result of domestic refining of crude, and increased dollar remittance from the NNPC.
“In the parallel market, we estimate further depreciation to ?1,500/$. This forecast is hinged on money supply expansion, limited accretion to reserve despite the incorporation of Bureau de change operators into the official exchange rate market.

Upside risks to our outlook include a significant rise in external reserves, material increase in foreign exchange inflows, and reduction in Money Supply.”id.

Making a similar projection, Dr. Sylvester Anaba, Team Lead, Research, United Capital Plc, an arm of the UBA Plc, said: “While some of the factors contributing to Naira depreciation have been acknowledged, their comprehensive solution remains elusive. This raises a significant risk of their persistence into 2024.
”Considering Naira’s persistent weakness in relation to key global currencies like the US Dollar, the likelihood of additional devaluations looms unless the aforementioned issues are effectively addressed.”
Speaking further, Anaba noted that fortunes of the Naira in 2024 will be influenced by a combination of global forces namely global oil price, international trade and U.S monetary policy.

He stated: “Nigeria is heavily reliant on oil exports, and fluctuations in global oil prices significantly impact the demand for Naira. Stable or rising oil prices could strengthen the Naira, while a decline could put downward pressure on the Naira.

”Global trade trends and the strength of major economies like the US and China will influence the demand for major currencies like USD and EUR, indirectly impacting the exchange rate for Naira.
US Federal Reserve decisions regarding interest rates and quantitative easing in the US can affect capital flows and currency movement globally, impacting the Naira as well.”

In his projection for the Naira in 2024, Steve Osho, the Co-Founder, Comercio Partners Limited, stated: “While predicting currency movements is inherently uncertain, the persistent naira depreciation observed in 2023 is likely to remain a concern in 2024 if the structural issues in the forex market, reliance on oil revenues, and policy inconsistencies persist.

“The outlook will be influenced by a combination of domestic reforms, global economic conditions, oil market dynamics, and the effectiveness of monetary policy. Investors and stakeholders should closely monitor these factors to assess the evolving landscape and make informed decisions based on the prevailing economic conditions.”

Also speaking on the foreign exchange market, President, Nigerian Economic Society, NES, Professor Adeola Adenikinju, said: “I expect a breather (in 2024) and it will not be as volatile as we had it in 2023, primarily because if the refineries belonging to NNPC and Dangote come on stream, the Naira will get a relief.”
Commenting on fortune of the Naira, Tajudeen Olayinka, CEO of Wyoming Capital and Partners, said: “The current exchange rate at over a thousand Naira to the dollar is obviously under valuing the Naira. I still see lack of a comprehensive adjustment program as being responsible for the setback in the value of the Naira. ”There are indications that government will depend largely on the use of private capital to drive activities in the economy in 2024 and beyond. It then follows that something must give way to improving liquidity and achieving stability in the foreign exchange market”.

Inflation

On inflation component of the macroeconomic headaches, NES President, Adenikinju, said, ”inflation will still be above the Central Bank of Nigeria, CBN, tolerable rate of 13 percent. Inflation may decelerate but it will still be in high double digits. We are at 28 percent now, it may decelerate to 22 percent in 2024. I don’t see it climbing up continuously as it has done but in my view it will still be in the low 20s.”
Commenting on the inflation outlook for 2024, the Wyoming Capital boss, Olayinka, said: “Macroeconomic environment in respect of inflation is that the current inflationary pressure is caused largely by supply-side factors, and for as long as these factors are not properly dealt with, so long we will continue to witness rising inflation.

”I do hope government will get back to work with some of the reform programs it started earlier in the course of the administration in a more robust and comprehensive manner, so as to properly reset the economy.

”The economy is in a state of disequilibrium, hence the prolonged state of inflation and stunted economic growth. Government must run a comprehensive adjustment program to deliberately cause a reset of the economy. There is no two way about it”.

Interest rate concerns
On concerns about interest rates NES President held that the interest rate would “come down if we are able to manage our inflation rate well. If inflation goes down then you will expect the interest rate to also go down.

”The extent to which the CBN can influence the interest rate is dependent on how we are able to contain inflation”.

On this Olayinka said, ”government is more interested in seeing a regime of low interest rate in 2024 and beyond, but this will not happen in 2024, as interest rate has to go up first to attract foreign portfolio inflows and subsequently help to improve liquidity in the foreign exchange market. This way, we hope to see moderation in interest rate in Q4 2024 or Q1 2025, going forward.”

GDP
NES president, while expressing optimism that the country’s Gross Domestic Product, GDP, will continue to grow in 2024, said however, that the growth will be dependent on government actions.
He stated: “The GDP will grow as it has done in the past few years but will do this at a very low rate, below five percent. So if we want to drive GDP growth rate next year it will depend on what we do in the agricultural sector.

”The extent to which we reduce insecurity, the extent to which we are able to combat the effect of climate change will be very important to drive up the agricultural sector.

“So the GDP will grow but whether the growth will be enough to reduce unemployment and also reduce poverty is the big question. Are we going to meet the 2.6 percent in the budget is also a big question. It all depends on what we do as a country to tackle the headwinds.

On GDP, Olayinka, the Whoming Capital boss, said ”we have to go back to a package of policies and programs that constitute a comprehensive adjustment program. Economy that is known to be technically far away from full employment output cannot afford to celebrate 3% or 3.5% growth. We must look for a way of restoring equilibrium.”

Macroeconomic situation is expected to improve in 2024 — Adonri

In his own remarks, David Adonri, Analyst and Executive Vice Chairman at HIGH CAP Securities said : ” The macroeconomic situation remained depressing with galloping inflation which rose from 21.5% in January 2023 to 28.2% in November 2023. GDP growth rate fell short of expectation ending Q3 with 2.54%. Following market reforms, Naira depreciated from N449.05/$1.00 in January 2023 to N802/$1.00 in December at I&E Window. Macroeconomic situation is expected to improve in 2024 as the economy readjust to New price level. The commencement of domestic refining of crude oil is expected to have salutary effect on forex and petroleum products prices.

On monetary policy , Adonri said : ” government is expected to focus on price stability. If CBN carries out the policy of recapitalization of banks in 2023, then the primary market for equities may take center stage in 2024. Several manufacturers whose balance sheets were wounded by the market reforms are also likely to access the capital market for funds in 2024.

The Commodities ecosystem is likely to be very active in 2024 if current military action against bandits, terrorists and insurgents is pursued with undiminished intensity.”

We anticipate some level of normalisation around recent policy statements — Chiazor
Commenting as well, Victor Chiazor Analyst and Head of Research and Investment at FSL Securities Limited said: ” Government policies around foreign exchange and subsidy removal had a negative impact on the economy. The economy was hit by high inflation and slow GDP growth, even as the monetary policy committee maintained a tight monetary regime in a bid to reign in inflation.

In 2024, we anticipate some level of normalisation around recent policy statements by the government.The economy is expected to benefit from savings on subsidy payments and the savings on FX used to import PMS once the dangote refinery goes live. This we expect to improve the country’s foreign reserves and help strengthen the naira. However, issues around high government debt and low government revenues will need to be addressed along with other structural issues. Overall we expect a better economic outing in the new year with GDP hiting about 3.5%.”

Inflation will remain elevated but moderated — Prof Uwaleke
Commenting as well, Prof Uche Uwaleke, President, Association of Capital Market Academic of Nigeria, ACMAN, said: “Overall, I see an improvement in the macroeconomic environment.

Inflation rate will remain elevated but will moderate significantly due to the CBN’s tight monetary policy.
“But this will entail a high interest rate environment given higher expected monetary policy rate.
“The implementation of the outcome of the work of the Presidential Committee on Fiscal Policy and Tax Reforms will likely lead to an improvement in the ease of doing business as multiple taxes get streamlined.

On the other hand, GDP growth will likely remain weak as high interest rate environment and energy costs will continue to impede GDP growth.”

How the forex market will play out in 2024 — Muda Yusuf
The outlook for foreign exchange, according to Dr Muda Yusuf, would be influenced largely by the developments around the fundamentals of supply and demand of foreign exchange.
Yusuf is the immediate past Director General of the Lagos Chamber of Commerce and Industry, LCCI, and currently the CEO, Centre for The Promotion of Private Enterprise,CPPE.

He stated: “The supply side would be driven by the following variables, among others: Progress made with regard to curbing crude oil theft and boosting oil output;
“Prospects of attracting more investment into the oil and gas sector, especially leveraging the Petroleum industry Act; “The clearing of foreign exchange backlog by the CBN would impact on investors confidence and improve inflows in the medium to long-term;
“Growth diaspora remmittances and other inflows from FDI and foreign portfolio investment;
“Growth in non oil export leveraging new initiatives to boost investment in solid minerals and improve domestic capacity to export;
“Initiatives by the government to boost forex liquidity through crude oil forward sales by the NNPC; and
“Steps taken to securitise NLNG dividends to generate short term forex liquidity.”
He further said, there are also demand side factors that could improve outlook. These, according to him, include the following: “Import substitution effects of the improved prospects of domestic refining of petroleum products. This would reduce the demand pressure on the foreign exchange market.

“The prospects of growth in domestic petrochemical output which would reduce Import dependence by domestic manufacturing firms.

“The recent depreciation of the naira exchange rate is driving an inward looking strategy by many firms and households. This may ease forex demand in the medium to long-term.”