PwC: Collapse of FX Market into Single Window Led to 98% Devaluation of Naira in 2023

 Says capital repatriation challenges hampering FDI

Savings to reduce in 2024 as inflation soars

How Emefiele warned naira would tumble in floated FX regime in 2019 Bloomberg report

Emmanuel Addeh in Abuja

A report by PricewaterhouseCoopers (PwC), a global business advisory services firm, has said that the value of the Nigerian currency, the naira, has fallen by as much as 98 per cent due to the decision of the federal government to collapse the  foreign exchange market into a single Investors and Exporters (I&E) window in 2023.

In a document, “Nigeria Economic Outlook: Seven Trends that will Shape Nigerian Economy in 2024,” PwC stated that the slump by almost 100 per cent took place within a period of seven months, spanning May to December 2023.

The report also indicated the much-needed Foreign Direct Investment (FDI), which had taken President Bola Tinubu outside the shores of Nigeria several times since he took over power, might continue to be elusive this year, if investors were not able to easily repatriate their capital.

The report stated, “Foreign investment may remain subdued in 2024 due to capital repatriation challenges.

“Removal of fuel subsidy (which cost $10 billion in 2022), and the collapse of multiple FX windows into a single I&E window , which caused naira to depreciate by 98 per cent between May and December 2023, among other monetary policy efforts, were key programmes executed to spur growth and regain investors’ confidence.” 

The report said the planned fiscal and monetary policy reforms in 2024 were expected to stimulate economic growth, reduce inflation and address the FX challenges to drive investment.

At $85 per barrel prediction in Q1, 2024 due to the Organisation of Petroleum Exporting Countries (OPEC+) production cut, PwC explained that while this could boost revenue from crude oil sales this year, the high oil price and exchange rate devaluation might further raise domestic fuel costs.

According to the document, servicing external debt in foreign currency will become challenging due to exchange rate volatility and the devaluation of the naira.

It explained that savings might remain subdued in 2024 due to sustained inflationary pressures, currently about 28.9 per cent as of December 2023.

The marginal increase to growth and high inflationary levels, it said, signalled a weak macro-environment to investors.

PwC explained that the implementation of fiscal and monetary policy reforms was imperative for economic and sectoral growth and development, and a key driver to unlocking much-needed productivity and investments to economic sectors.

According to the audit and accounting firm, sectoral reforms, such as the recapitalisation of the banks, electricity act, National Agricultural Growth Scheme and Agropocket (NAGS-AP), the Petroleum Industry Act (PIA), among others, may drive investment to the sectors in 2024.

It stated that Nigeria’s deficit grew by 370 per cent between 2015 and 2023, leading to a high debt and debt servicing profile.

“Though debt stock to GDP is comparatively low at 37.1 per cent, the debt servicing to revenue ratio remains high at 124 per cent as of H1 2023,” PwC stated.

On likely risks, the firm stated that oil exports accounted for over 80 per cent of the country’s total exports, making dependence on it unwise.

“This makes the commodity and the economy susceptible to price fluctuations in the global oil markets,” it said.

With Nigeria’s foreign reserves steadily declining over the past five years, hitting a two-year low of $33 billion in December 2023, PwC stated that factors contributing to this decline included increased import bill, which grew by 33 per cent from N6.34 trillion in Q3, 2022 to N8.46 trillion in Q3, 2023.

Although the capital market performed well in 2023, gaining 46 per cent, despite sustained inflation and FX liquidity challenges, the report stressed that investors might remain cautious due to fiscal and monetary reforms to address inflation and FX illiquidity.

“Governance credibility, policy credibility and institutional credibility of key institutions, especially in communicating and implementing key policy changes, may continue to impact investor confidence,” the outlook stated.

On Nigeria’s infrastructural challenges, PwC explained that limited fiscal space for public investment and difficulty attracting private investments will constrain the ability to make essential infrastructure improvements.

It said, “Infrastructure funding may remain insufficient in 2024. The allocated infrastructure spending budget for 2024 is N1.32 trillion, falling short of both the World Bank’s suggested 70 per cent infrastructure-to-GDP benchmark (currently at 30 per cent) and the yearly $150 billion requirement specified in the National Integrated Infrastructure Master Plan for 2021-2025.”

On power, PwC stressed that despite the targeted 30GW supply by 2030, electricity supply had never gone beyond 6GW.

It said, “This implies that not much progress has been made since the target was set. This huge gap is due to deteriorating plants/units’ capacities, poor maintenance due to liquidity challenge and access to forex, non-binding contracts and delay payment, inadequate gas supply, transmission constraints, limited distribution network and commercial viability of Discos operation.”

While projecting a marginal decline in inflation, the company said the Russia-Ukraine war, among other factors, might fuel an upward swing.

Meanwhile, THISDAY stumbled on a report by Bloomberg in 2019, where the ex-governor of the Central Bank of Nigeria (CBN), Mr Godwin Emefiele, warned that floating the naira would lead to a free fall in its value.

Titled, “Free Float Would Send Naira Tumbling,” Emefiele had argued at the time that the country’s system of multiple exchange rates had produced the “most optimal results when compared with other emerging markets in recent times”.

Under Emefiele, who was appointed in 2014, Nigeria had tightened capital controls and closely managed naira’s value.

The then CBN governor had consistently said it was the best way to curb inflation and boost manufacturing by discouraging imports, even though several foreign investors had faulted the policy and said it exacerbated an economic downturn.

“We will get even more aggressive,” he had said. “This is because we think the initiative the central bank has to cut imports and diversify the economy is yielding results.”

The report said shortages of foreign exchange had eased at the time due to higher crude prices and CBN’s opening of a currency-trading window for portfolio investors that allowed them to buy the naira at a weaker level.

The rate in that window had almost converged with the black-market rate of around N360 to the dollar at the time. The naira is currently valued at over N900 to the dollar at the official market and N1,400 to the dollar at the parallel market.