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CBN lacks Liquidity to bolster naira, Economist Intelligence Unit reports

EIU Analysis Reveals Challenges and Economic Implications Amidst Currency Volatility

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In its latest Country Report on Nigeria, the Economist Intelligence Unit (EIU) highlighted significant challenges faced by the Central Bank of Nigeria (CBN) in supporting the naira amidst ongoing currency volatility and economic reforms.

The report underscores the CBN’s limited liquidity to bolster the naira, particularly in light of recent forex market unification efforts on June 14, 2023, which triggered a notable depreciation of the local currency.

Since then, the naira has struggled against the dollar, experiencing a significant devaluation of about 45%, positioning it as the second-worst-performing currency globally, trailing behind the Lebanese pound.

According to the EIU, the CBN may need to resort to foreign borrowing to reinforce the naira and meet foreign exchange obligations, citing the necessity to rebuild reserves and address currency volatility.

The report elucidates that while the Federal Government has pursued various borrowing initiatives to mitigate financial constraints, including loans secured against oil revenue and international capital market options, challenges persist amidst regulatory uncertainties.

In addition, the EIU raises concerns about the Nigerian government’s engagement with the CBN, particularly regarding fuel subsidy reinstitution and fiscal financing mechanisms. The report suggests that hasty implementation of economic reforms, such as currency floatation and fuel subsidy removal, may exacerbate inflationary pressures and social unrest.

Furthermore, the EIU revises its 2024 economic growth forecast for Nigeria, projecting a modest increase to 2.5%, driven by crude oil output and the anticipated commencement of operations at the Dangote refinery.

Despite these developments, risks to Nigeria’s economic outlook remain significant, with potential mass protests and strikes looming amidst policy-induced crises and inflationary challenges.

As Nigeria navigates these economic headwinds, the EIU underscores the imperative for measured policy interventions and strategic reforms to stabilize the currency and mitigate adverse socioeconomic impacts in the coming year.

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