Naira’s Freefall is Over – Isaac Marshall

Naira Expected to Sustain Gains Against the Dollar

naira exchange rate parallel market

The year 2025 holds significant promise for the stabilization of the Nigerian naira, which has experienced substantial depreciation in recent years. This is According to Isaac Marshall, an investor at TLG capital.

In 2024, the naira weakened by 40.9%, closing the year at ₦1,535/$ on the official exchange market. The currency’s decline was fueled by rising inflation, global economic challenges, and a sharp drop in oil prices, which left the naira in a precarious position.

However, there are indications that 2025 could be the year of recovery, with cautious optimism surrounding the naira’s trajectory.

Challenges in 2024

Nigeria faced significant economic hurdles in 2024. Inflation soared to 34.6% by November—the highest level in over two decades—driven by rising food prices, currency depreciation, and global economic tensions. A decline in global oil prices compounded the situation, making it difficult for the naira to stabilize.

However, towards the end of the year, the exchange rate appeared to stabilize within a range of ₦1,600–₦1,700. This development, coupled with ongoing economic reforms, provides a glimmer of hope for a more stable naira in 2025.

Reasons for Optimism

Several factors suggest that the naira could achieve greater stability in 2025:

1. Cooling Inflation

Nigeria’s inflation rate, which stood at 34.6% in November 2024, is projected to ease slightly to 34.5% for December. This expected decrease is attributed to base-year effects and marginal improvements in the exchange rate. In the 2025 budget, the president projected an inflation rate of 15%,  If these projections hold, they could set the stage for sustained recovery in 2025.

2. Bank Recapitalization

The Central Bank of Nigeria (CBN) announced a recapitalization policy in March 2024, requiring banks to increase their capital base. The capital requirements were raised to ₦500 billion for international banks, ₦200 billion for national banks, and ₦50 billion for regional banks. This policy aims to strengthen the financial sector, ensure liquidity, and stabilize the naira.

The recapitalization plan is expected to reduce the number of banks in the system through consolidation, creating larger, more robust financial institutions. These stronger banks will be better equipped to absorb economic shocks, finance large-scale projects, and support economic growth, all of which are crucial for the naira’s stability.

3. Exchange Rate Unification

The CBN has made significant progress in unifying Nigeria’s exchange rate system through the introduction of the Electronic Foreign Exchange Matching System (EFEMS). This system automates the matching of buy and sell orders for foreign exchange, increasing transparency and efficiency. As a result, reliance on the parallel market has decreased, and the central bank has strengthened its control over foreign exchange supply.

4. Increased Oil Production

Oil remains a critical source of foreign exchange for Nigeria. In November 2024, crude oil output rose to approximately 1.8 million barrels per day (b/d), up from an average of 1.5 million b/d earlier in the year. This increase was driven by the operational commencement of the Dangote Refinery and the revitalization of the Port Harcourt and Warri refineries.

For 2025, the federal government aims to achieve a production target of 3 million barrels per day. Higher oil production is expected to boost foreign exchange earnings, strengthening the naira.

5. Reduced Imports and Economic Diversification

The Nigerian government has intensified efforts to reduce reliance on imports and boost non-oil exports as part of its economic diversification agenda. The country has made strides in exporting agricultural products, solid minerals, and manufactured goods. A recent bilateral agreement with France to harness Nigeria’s solid minerals is expected to generate significant foreign exchange revenue.

As these diversification efforts bear fruit in 2025, increased export earnings could support the naira’s recovery.

Risks to Naira Stability

Despite the optimistic outlook, several factors could undermine the naira’s recovery:

1. Global Oil Market Dynamics

The potential return of Donald Trump to the White House and his “Drill, baby drill” policy could increase U.S. oil production, intensifying competition in the global oil market. This scenario may prompt OPEC+ to cut oil supply, leading to a crash in global oil prices. Lower oil prices would reduce Nigeria’s foreign exchange earnings, exerting downward pressure on the naira.

2. Inflation Risks

While inflation is projected to decline, unforeseen events such as global tensions, supply chain disruptions, or natural disasters could reverse this trend. A spike in inflation would weaken the naira’s value in the foreign exchange market.

3. Debt Servicing Burden

Nigeria’s 2025 budget allocates ₦15.18 trillion for debt servicing, with much of this debt denominated in dollars. Coupled with a projected deficit of ₦13.14 trillion, the government will need to borrow heavily. This increased demand for dollars to service debt could weaken the naira, especially if foreign exchange inflows fail to keep pace with outflows.

4. Currency Speculation and Hoarding

Speculative activities in the cryptocurrency market and hoarding of dollars could destabilize the naira. With Trump’s pro-cryptocurrency stance, more Nigerians may accumulate dollar-denominated crypto assets, increasing demand for dollars and putting additional pressure on the naira.

Furthermore, as Nigeria approaches the 2027 elections, politicians may hoard dollars for campaign financing, reducing the amount of foreign currency in circulation. This scarcity could weaken the naira further.

Conclusion

The naira’s fate in 2025 will depend on the success of ongoing economic reforms and the effective management of risks. While there are strong reasons for optimism, including cooling inflation, bank recapitalization, exchange rate unification, increased oil production, and reduced imports, potential challenges such as global oil market dynamics, inflation spikes, debt servicing burdens, and speculative activities remain significant threats.

Ultimately, 2025 could mark a turning point for the naira. If Nigeria’s economic policies and reforms are effectively implemented, the currency could achieve the long-sought stability. However, policy missteps or external shocks could reverse these gains, leaving the naira vulnerable to further depreciation.

The year ahead will be pivotal for Nigeria’s economic recovery and the resilience of its currency.

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