The Nigerian naira has collapsed, and analysts warning that the worst could happen for the venerable currency. The USD to NGN exchange rate was trading at 1,687 on Thursday, a few points below the all-time low of 1,680. Similarly, the black market naira rate was trading at 1,740.
Budget deficit and dollar liquidity
The Nigerian naira has imploded by over 70% this year, making it the third-worst performing currency globally.
This crash happened as the Nigerian economy grapples with deteriorating fundamentals, including low oil prices, high unemployment rate and inflation, and lack of dollar liquidity.
Crude oil prices have continued falling this year, with Brent and West Texas Intermediate (WTI) falling to $72 and $68, respectively.
These prices could continue to fall further after Trump’s re-election because he has pledged to deregulate the industry. Such moves will lead to a sharp increase in US oil production at a time when the country is pumping over 13 million barrels of oil a day.
Nigeria’s economy is mostly dependent on oil, which accounts for over 60% of the GDP. As such, lower oil prices at a time when government spending is increasing has led to more deficit.
Data released this week showed that Nigeria’s budget deficit-to-GDP jumped to 7.5%. Precisely, the deficit jumped to over N4.53 trillion in the second quarter from N3.88 trillion. The deficit widened as the government struggled to raise adequate revenues as oil prices drop and as the unemployment rate remains substantially higher.
At the same time, the measures taken by the government to attract foreign investments are not working out as expected. After last year’s election, the government removed some of the top factors that were dragging FDI to Nigeria.
For example, the government ended fuel subsidies, while the central bank devalued the currency to bridge the gap between the official and non-official exchange rates. Recent data shows that Foreign Direct Investment (FDI) in the country has not been growing. FDI dropped by 65.3% in the second quarter.
Meanwhile, the Nigerian economy is relying mostly on the World Bank financing, with the International Monetary Fund (IMF) staying aside. The IMF is often seen as an ideal partner because it guarantees that foreign companies will be able to take the money out of the country.
Analysts are pessimistic about the Nigerian naira
The deteriorating currency has hit many Nigerians and companies hard. Just a few months ago, the top six biggest Nigerian companies reported a whopping $385 million in losses. Some of the top firms that reported these losses were Airtel. Nestle Nigeria, Nigeria Breweries, and Cadbury Nigeria.
Most of these firms will likely remain under pressure as they start to pay off their dollar debt. Analysts believe that a wave of bankruptcies or Nigerian exits cannot be ruled out as the naira plunge accelerates.
In an interview, one analyst from VerivAfrica estimated that the USD/NGN exchange rate will surge to 2,000 in 2025. With the naira trading at 1,687, that movement implies a 18.5% increase from the current level.
The key challenge for the naira is that the more it crashes, the more many Nigerians are losing confident in it. As such, as we have seen with Zimbabwe’s currency situation odds of the naira bouncing back are getting limited by the day.
USD to NGN forecast
USD/NGN chart by TradingView
The daily chart shows that the USD/NGN exchange rate has been in a tight range in the past few months. It has risen slightly above the 50-day and 100-day Exponential Moving Averages (EMA), which is a bullish sign.
The pair has also formed an ascending triangle pattern, which is a popular bullish sign. Therefore, the path of the least resistance for the pair is bullish, with the next point to watch being at 1,800.
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