IMF Warns of Further Depreciation of Nigeria's Naira and Rising Inflation

The International Monetary Fund (IMF) has issued a warning that the exchange rate of the Nigerian Naira is expected to depreciate by about 35 percent this year. This depreciation could lead to inflation peaking at 44 percent before monetary policy tightening can bring the situation under control.

In its February 2024 Post-Financing Assessment and Staff Report, the IMF noted that Nigeria's current monetary policy is insufficiently tightened to bring inflation below 20 percent, especially as pressures on the Naira persist. The report also highlighted that the absence of local production and the recent liberalization of commodity imports could further contribute to the depreciation of the exchange rate.

Additionally, the IMF raised concerns about the uncertainty surrounding Nigeria's net international reserves level, noting that this poses additional risks. Exogenous shocks that impact external stability, poverty, and food insecurity could further exacerbate the situation.

The report also mentioned that Nigeria's fiscal deficit could increase above six percent of GDP in 2024 and 2025. This increase is partly driven by higher transfers to address social unrest and a rise in the implicit fuel subsidy.

Despite efforts to implement expenditure measures, such as phasing out the implicit fuel subsidy, the debt-to-GDP ratio is still projected to rise by six percentage points above the baseline by 2028. The spike in inflation and rise in uncertainty could trigger portfolio outflows, making it difficult for Nigeria to access Eurobond financing. This, in turn, could lead to a decline in reserves to $17 billion by 2025.

The IMF highlighted that while Nigeria would be able to repay the fund, even in a downside scenario, there could be severe trade-offs. The authorities would need to prioritize external debt service, potentially competing with urgent humanitarian needs to tackle rising poverty and food insecurity.

Overall, the IMF's report underscores the challenges facing Nigeria's economy and the need for careful management of its monetary and fiscal policies to address these challenges effectively.