Dear Subscriber,
CBN embarks on a rescue mission for the naira
In January 2024, the naira was believed to be on a one-way plunge towards N3000/$. Even the more ardent believers in free market economics had serious doubts that the naira could be salvaged.
Scrap the naira???
Some even suggested scrapping the currency, changing its name to cowrie, dinheiro, new naira, kudiowo, etc. There were those who felt that the euthanasia principle of mercy killing for terminal patients in pain should be adopted. This was because skeptics were of the view that the naira was doomed or jinxed. They felt that the more you try to revive its value, the deeper it sinks.
So after that, what next?
Our view is that the naira is bottoming out. It has less downside risk than upside potential. Just like the economy, a U-curve recovery is more likely than a V-curve (quick fix). Our model suggests the naira will trade in the parallel market at the N1500/$–N1650/$ range through the months of March and April before a gradual and slow recovery. This means extended pain for Nigerian importers, manufacturers, and, more specifically, consumers.
The rich also cry
According to the economist magazine, “on the wealthy peninsula of Victoria Island, prices are changing so quickly that shopkeepers have given up on tags altogether. At the till, one might be shocked to discover that a tomato is now N120. Last year, that could get you four, enough to balance the hot spice in a pot of jollof rice.”
The big question on the lips of investors is, “What is a cause and what is an effect between inflation and the weak naira?” Does a weak naira lead to inflation, or does inflation weaken the naira? The CBN has embarked on an unprecedented tightening of the naira, money markets, and excess liquidity. The policy rate is up 400 basis points to 22.75%, and more dreary is the 12.50% increase in the CRR ratio to 45%. In response, the effective lending rates are now at 32.5% p.a., which will undermine the loan portfolios of most banks. An increase of this magnitude in interest rates could raise the non-performing loans of banks by over 7% in 2024 with an attendant jump in the loan default rate.
Beware the ides of March!!!
We are of the view that the naira will appreciate in the second half of 2024 as inflation moderates and interest rates begin to decline. However, in the interim, investors should fasten their seatbelts for the bumpy months of March and April. In the study of Roman history, we always say “beware of the ides of March” in the words of Spurinna warning Julius Caesar of the imminent danger ahead.
Enjoy your read!
