Nigeria’s inflation may peak at 44% as naira value worsens – IMF 

NAIRAMETRICS

In its recent post-financing assessment report concerning Nigeria, the International Monetary Fund (IMF) has painted a grim picture of the nation’s economic future.

The IMF warns that Nigeria’s inflation rate could soar to an unprecedented 44% if the Central Bank of Nigeria (CBN) fails to tighten its monetary policy significantly. 

This alarming inflation rate is projected under a scenario where the naira continues to face severe pressures, compounded by the potential impact of a climate shock hitting the country early in 2024. 

The report outlines a concerning sequence of events where the combined effects of insufficient monetary tightening, persistent pressure on the naira, and adverse climate conditions could severely disrupt Nigeria’s economic stability. 

The IMF forecasts a possible 35% depreciation of the naira in 2024, further exacerbating the inflationary pressures. 

The IMF noted: 

• “An adverse scenario of an inflation-depreciation spiral combined with a climate shock would increase risks to Nigeria’s capacity to repay the Fund. Staff presented a downside scenario to the authorities with the following features: 
• “Monetary policy is tightened insufficiently to bring down inflation below 20% and pressures on the naira persist. In addition, Nigeria is hit by another adverse climate shock in early 2024 (following severe flooding in late 2022) that exacerbates the current weakness in agriculture and leads to a decline in output and a surge in food prices. 
• “Given the absence of local production and the recent liberalization of commodity imports, the exchange rate would likely depreciate further—by an estimated 35% in 2024—and contribute to a further sharp rise in inflation, peaking at 44%, before monetary policy is eventually tightened sharply.” 

Despite these challenges, the IMF believes Nigeria will repay the Fund, assuming the prioritisation of external debt service continues. 

However, the need to address urgent humanitarian concerns, including rising poverty and food insecurity, threatens this repayment capacity, which would necessitate significant trade-offs. The uncertainty surrounding Nigeria’s net international reserves and the potential for further exogenous shocks adds additional risk to the country’s economic stability and citizens’ well-being. 

More Insights 

• The Nigerian Naira faced a significant decline against the US Dollar in the official market, closing the week at an alarming rate of N1,537.96/$1. 
• This downturn is attributed to persistent demand pressures that continue to erode the currency’s value, further highlighted by a dramatic 74% drop in forex turnover to $84.10 million. This decrease in forex liquidity exacerbates the challenges facing the Naira, as both official and parallel market rates suffer from devaluation, casting a shadow over the nation’s economic stability. 
• Adding to Nigeria’s economic woes, the National Bureau of Statistics (NBS) reported a significant inflation surge to 29.90% for January 2024, marking a notable increase from the 28.92% recorded in the previous month. 
• This uptick in the headline inflation rate, by 0.98% points compared to December 2023, underscores the persistent inflationary pressures plaguing the Nigerian…