FDC Whispers – November 06, 2023

Dear subscriber,

Naira’s gains – is this trend sustainable or is a reversal now inevitable?

In the first week of November, the naira gained 30.7%, reaching a six-week high of N995/$ before reversing itself to the current value of N1,030/$. The reasons for this are not far-fetched. The CBN surprisingly announced the settlement of approximately $1 billion of its backlog of $6.7 billion of its Non-Deliverable Forwards (NDF).

Based on this optimism, the market went ahead of itself and appreciated far in excess of its fair value, partly due to profit-taking and also speculative activities. In view of the supply shortfall in the foreign exchange market, the risk is that the market could reverse itself far in excess of its weakest point (N1,350/$). The hope is that the central bank will intervene by increasing forex supply to allow the naira to settle around its current level.

2024 budget increased by 19.2% (nominal terms) but declined by 46.3% (dollar terms)

The 2024 budget unveiled by the federal government stands at a whopping N26.01 trillion. This figure, in nominal terms, represents an increase of 19.2% when compared to the approved 2023 budget (N21.83 trillion). Noteworthy is that this amount does not include the 2023 supplementary budget of N2.17 trillion. However, in dollar terms, the proposed federal government expenditure fell 46.3% to $25.5 billion due to naira weakness in the forex market.

A major concern for budget watchers is that the official exchange rate assumption is N700/$, which appears highly optimistic. This situation, coupled with persistent inflationary pressures, poses a significant challenge to using the budget as a tool of economic management.

In this latest edition of FDC Whispers, the Think Tank carries out an in-depth analysis of recent economic trends in fiscal and monetary policy in Nigeria.

Enjoy your read!