Riding the waves of naira volatility, debt services

• Published date: 10 January 2023
• Publication title: Nigeria - The Nation

The naira will have a turbulent outing this year due to election-induced pressure and persistent scarcity of dollar.

After a year in which Nigeria's post-COVID-19 economic recovery was derailed by the combined effects of surging inflation, geo-political instability, adverse weather and a looming risk of debt distress, negative impact for the naira looks set to continue into 2023.

Higher global fuel and food prices driving record inflation are a particular strain on government finances and consumer spending in the country, where for the majority of people, food accounts for over 40 per cent of spending.

International capital exiting speculative assets, which caused depreciation of the naira in 2022, shows little sign for now of a reversal.

The Naira opened the year broadly unchanged at N750/$ from N748/$ in the final week of 2022.

FX Trader, AZA Finance, Ikenga Kalu, said the naira lost almost a third of its value on the parallel market last year as Nigeria's ability to benefit from higher commodity prices was challenged by an extended shutdown of its oil production facilities and crude pipeline vandalism and theft.

With FX reserves steadily depleting during 2022, the Central Bank of Nigeria (CBN) has halted dollar sales in the parallel market, further reducing supply and contributing to the Naira's weakness.

'Given unwaning demand for dollars and reduced capacity for interventions in the parallel and official markets, we expect further currency depreciation over the next 12 months, with February's presidential election pivotal in determining the pace of decline,' he said.

With naira depreciation come rise in debt service costs.

The World Bank predicted that steep depreciation of the naira would continue to worsen Nigeria's debt, a large part of which is denominated in dollars.

World Bank President, David Malpass, said poorest countries eligible to borrow from the World Bank's International Development Association (IDA) will spend over a tenth of their export revenues to service their long-term public and publicly guaranteed external debt.

The figure, it stated, is the highest proportion since 2000, shortly after the Heavily Indebted Poor Countries (HIPC) initiative was established, the World Bank's new International Debt Report shows.

The report highlights rising debt-related risks for all developing economies-low- as well as middle-income economies. At the end of 2021, the external debt of these economies totaled $9 trillion, more than double the amount a decade...