By Clem Aguiyi
Tel: 08034747898
Email: totalpolitics@ymail.com
It is the economy, stupid. This was a phrase coined by James Carville in 1992. 2024 was a very depressing year for the Naira. The economy was growing but wasn’t growing enough to make the Naira strong. Indeed, it was a tough year for the CBN struggling to gain its footing as the apex bank and regulator.
The Naira was on a spiraling doom. At a time, it was feared that the exchange rate might cross N2000 per dollar, but the Central Bank managed to stem the tide thereby proving Bookmakers and Nay Sayers wrong. The Naira rebounded in many instances.
Not that everything was done right, truth is that Cardoso, the Central Bank Governor and his team deserves some credits for steadying the local currency and not allowing the freefall of the Naira cross over the N2000 per dollar mark. They have proven they are steady hands, and that if they get the required supports and cooperation they will eventually turn the curve and get the economy back on the right track.
The year 2025 is shaping up to be a promising year of hope for the economy. Optimists believe that after the wild swings of 2024, Nigeria’s currency might finally gain stability. The reasons are compelling enough: The Dangote Refinery, a private refinery owned by the Dangote Group which is expected to process about 650,000 barrels of crude oil per day is currently processing about 550,000 barrels per day which is fascinating.
Other refineries like the Walter Smith Refining and Petrochemical Company, Akwa Ibom Refinery, Port Harcourt Refinery Company are coming up. Also under way are the refurbishing of the Warri and Kaduna refineries with the potentials of making Nigeria an emerging energy power house. The emergence of Dangote Refinery, the largest built so far already reduced petrol imports, and relieved pressure on FOREX needs. Also, an economy hungry to diversify beyond oil brings hope for a better future. But let’s not celebrate yet for it’s not yet Uhuru.
A cocktail of domestic policy missteps and global economic shifts could send the Naira stumbling once more and have the Monetary Policy Committee scrambling for solution. The CBN must brace up for this reality as the signs are already there and all the hand writings are on the wall. Only the prepared will win. The following are critical factors to watch out for:
Global Economic Shifts: A second Trump presidency could bring significant changes to the global oil market. During his previous term, Trump’s policies increased U.S. domestic energy production, leading to a glut in oil supply and lower global crude prices. His energy campaign rhetoric was phrased in three words “Drill Baby Drill’’. Trump in his first term cared less about climate change and will very likely pull out the United States once again from the Climate Change agreement, even though some of his policies will advance clean energy, but definitely his America First agenda will seek to reduce the US dependency on foreign fossil fuels. The outgoing Biden administration already procured 6 million barrels of oil for strategic petroleum reserve despite the US holding about 2.1% of the global oil reserve.
Already, there are signs that Trump’s new administration will differ significantly from Biden. He will issue more licences and expand oil drilling which will boost the US economy, preserve jobs and cut down inflation. If Trump returns to the White House as the 47th President as he would by January 20th 2025, Nigeria’s primary source of foreign exchange could be severely impacted, making it challenging for the Naira to be stable.
Furthermore, the U.S. economy’s robust job numbers have reduced hopes for aggressive interest rate cuts by the Federal Reserve in 2025. If interest rates remain high, the dollar will likely stay strong, leading to capital outflows from emerging markets like Nigeria. This could put additional pressure on the Naira as investors seek safer investments with higher returns. It is left for the CBN to find an antidote to this factors as they bound to occur.
Domestic Policy Missteps: On the 18th of December 2024, Nigeria’s President Tinubu presented a record N49.74 trillion 2025 budget proposal –36.62% % higher than the previous year. The government spending plans for 2025, which focus heavily on infrastructure and military budgets, will require substantial borrowing. The government already targets N13.10trn borrowing and debt service of N15.38trn. While borrowing for growth can be beneficial, excessive fiscal deficits often lead to currency devaluation.
The increased circulation of naira, combined with a higher demand for dollars to service debt, could create a perfect storm for the Naira. In other words, for the Naira to gain a semblance of stability, monetary policy must match with fiscal discipline. Also, the targeted N35.05trn revenue can only be realised if the much opposed Tax Reform Bill before the National Assembly is passed. Supporters of the Bill claim that the bill is required to retool the economy.
Inflation and Speculation: Inflation could also play a significant role in the Naira’s fate. Although Nigeria’s inflation rate which is at 32.70% is forecasted to decline, geopolitical shocks or supply chain disruptions could keep prices high. If inflation cools faster in Western countries than in Nigeria, inflation differentials could come into play, potentially forcing adjustments that don’t favour the Naira.
Additionally, cryptocurrency enthusiasts and dollar hoarders may contribute to the Naira’s volatility. The growing appetite for stable coins in 2024 drove up dollar demand, and a Trump presidency could reignite crypto interest, pushing Nigerians to seek more dollar-backed assets. Local speculators may also exploit volatility, especially if geopolitical tensions rise or oil prices falter. Ending the war between Russia and Ukraine and halting the middle East crisis from further escalation will be pivotal factors that may either weaken or strengthen the fragile Naira.
Politics and Forex Markets: Nigeria’s political landscape could also impact the Naira’s stability. With the 2027 elections on the horizon, political actors are already preparing for the polls. The hoarding of dollars for campaign war chests will likely begin in earnest by 2025, potentially distorting forex markets and adding complexity to the Naira’s fragile stability.
In light of these potential risks, the Central Bank of Nigeria (CBN) must be proactive in managing the Naira’s stability. This includes:
– Maintaining forex reserves: The CBN must ensure that Nigeria’s forex reserves are sufficient to withstand potential shocks.
-Managing inflation: The CBN must continue to implement policies that keep inflation in check, such as adjusting interest rates and regulating money supply.
-Regulating borrowing: The CBN must ensure that Nigeria’s borrowing is sustainable and doesn’t lead to excessive fiscal deficits.
-Monitoring speculation: The CBN must keep a close eye on speculative activities, including cryptocurrency trading and dollar hoarding.
-Improving monetary policy framework: The CBN must continue to strengthen its monetary policy framework to ensure that it is better equipped to respond to potential shocks. Enhancing -Financial inclusion: The CBN must continue to promote financial inclusion initiatives to reduce the country’s reliance on cash and promote electronic payments. Strengthening banking regulations: The CBN must ensure that banking regulations are strengthened to prevent banks from taking excessive risks that could destabilize the financial system.
In conclusion, the Naira’s fate in 2025 is uncertain, and several risks could further weaken it. To mitigate these risks, policymakers must be proactive in managing inflation, keeping forex reserves intact, avoiding excessive borrowing and abuse of the ways and means. The CBN must also be prepared to respond to potential shocks, including a second Trump presidency, global economic shifts, and domestic policy missteps. Only time will tell if the Naira will find its footing in 2025 or lose its balance entirely.
However, one thing is certain: the CBN must buckle up and be prepared to take risky, measured, careful and decisive actions to protect the Naira. By taking proactive measures, the CBN can help mitigate the risks facing the Naira and ensure that Nigeria’s economy remains stable and prosperous.
