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Business News of Wednesday, 4 January 2023


What could happen to the exchange rate in 2023

Naira and Dollar Naira and Dollar

2022 arguably saw the steepest slide of the naira on the parallel market since it was introduced as Nigeria’s store of value and medium of exchange on January 1,1973.

As of January 1, 2022, the naira was exchanged for N565/$1 at the black market. But by year-end, it had depreciated by 23% to close at N735/$1.

2023 may present different economic dynamics that could alter the steady fall.

What experts are saying: Some experts who spoke to Nairametrics said the appreciation or depreciation of the naira in 2023 will depend on the policies of the incoming administration.

The Chief Executive Officer of Anthill Concepts Limited, Dr Emeka Okengwu, said that at best, the value of the naira will remain as it is or it will erode in value in the coming months.

He noted that usually, currencies don’t do well in election years because there are a lot of assumptions; a lot of people stay on the fence. He further noted that he does not see the naira doing better over the next three or four months until the new government comes in and begins to steer clear policies.

Meanwhile, Mr Johnson Chukwu, the CEO of Cowry Asset Management, also agreed that the policies of the incoming government will determine the direction of the economy. He said the right policies will stabilize the economy and increase the production of crude oil, as well as increase the country’s reserves, and therefore stabilize the exchange rate.

He said beyond that, a good government will enjoy local and international confidence to attract portfolio and foreign direct investment, all of which will stabilize the exchange rate.

He however said that if the elections are not conclusive, or the policies of the government are not in tandem with the expectations of investors then the local currency will continue to lose value. He added that the Dangote Refinery will have some positive impact on the economy, but not enough to affect the exchange rate.

Moses Igbrude, the National Coordinator-elect of the Independent Shareholders Association of Nigeria, said the naira has been consistently depreciating against the dollar over the years, but politics will play a role this year.

He said among the four frontline candidates, there is one who understands business and the dynamics of the economy, and once that person wins the naira will appreciate.

Paul Atuma, an economist and social affairs analyst said if politicians continue running Nigeria with the ‘business as usual attitude, the naira will continue to slide. He explained ‘business as usual’ to be politicians and friends of politicians feeding fat on the economy without being productive.

New monetary policies expected: Dr Muda Yusuf, the Chief Executive Officer of the Center for the Promotion of Private Enterprise (CPPE) said Nigeria needs to look at the issue within the context of the key drivers of the value of the naira. He said one of the major drivers is policy.

He stated that he expects that the next administration will do a review of some of the policies of the current administration, which will likely bring a more flexible regime in the foreign exchange. Afterwards, Nigerians will likely see improvement in the value of the naira because one of the problems that have led to the poor performance of the naira is the dysfunctional policies around it.

He said we should have some positive expectations if any of the frontline candidates emerge.

Another factor that is likely to impact the value of the naira is the reforms around the oil and gas industry, according to Dr Yusuf. He said:

“If we can see reform implementation around oil and gas, it will reduce subsidies and importation of petroleum products that put a lot of pressure on Nigeria’s reserves; with appropriate reforms in the oil and gas sector and better environment in terms of domestic refining, it will have some positive effects on the currency.”
He said the other issues are structural, which may take some time to materialize, referring to import substitution and capacity to export, stressing that import substitution is a function of how well the domestic manufacturing sector can substitute imports, which is a function of infrastructure, interest rates etc.

He said the only element of import substitution that he expects will have immediate positive development will be if the government can fix the refineries as promised and if the Dangote Refinery comes on stream. Then, according to him, the pressure will reduce on the naira.

He said another variable is the ways and means of the Central Bank because it puts a lot of liquidity in the economy. He said with the lawmakers beginning to put an eye on ways and means, maybe that will put a hold on excess liquidity in the system, and that will have a positive impact on the naira value.

Impact of external policies: He cautioned that there is an external factor, which is the monetary policy environment in advanced economies.

He said for as long as there is a tightening of monetary policy in advanced economies and the dollar and other currencies are getting stronger, it will be difficult to maintain a strong naira because the stronger currencies of advanced economies get, the weaker the local currency will be.