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Professional services firm PwC has expressed confidence that the interventions by the Central Bank of Nigeria (CBN) will lead to the long-term stabilization of the naira. This assessment was detailed in PwC’s latest economic outlook for Nigeria, titled ‘Navigating Economic Reforms’.
PwC stated, “Interventions by the CBN may stabilize the naira in the long-term. However, these interventions may become less effective without improved capital flows and export proceeds to bolster foreign reserves.”
The report highlighted that capital importation saw a 6% increase, rising to $1.1 billion in Q4 2023 from $1.0 billion in Q2 2023. This growth was driven by a substantial increase in Foreign Portfolio Investments (FPI), which surged by 189% from $106.9 million to $309.8 million, and Foreign Direct Investments (FDI), which rose by 113.9% from $86 million to $183.9 million between Q2 and Q4 2023.
The surge in FPI was attributed to increased investments in money market instruments, while the rise in FDI was linked to higher equity investments.
PwC suggested that capital importation might continue to improve in 2024 due to policy actions by the CBN aimed at rebuilding investor confidence. These actions include settling foreign exchange backlogs and increasing the Monetary Policy Rate (MPR) to 26.25% to maintain price stability.
In May, the Monetary Policy Committee (MPC) of the CBN raised the benchmark lending rate to 26.25%, citing the need to curb inflation. However, several committee members also expressed concerns about the liquidity issues in the foreign exchange market, which had contributed to market volatility.
MPC members emphasized the importance of maintaining a tight monetary policy stance to make domestic yields more attractive for both local and foreign investors. Emem Usoro, a committee member who voted for a 150 basis points increase in the MPR to 26.25%, argued that tightening financial conditions would reduce the negative interest gap and attract more capital inflows, thereby stabilizing the naira exchange rate.
Usoro explained, “Sustaining a tight monetary policy stance potentially makes domestic yields more attractive for both domestic and foreign investors, supports the naira, and helps build up external reserves. It also helps control imported inflation, which is crucial given Nigeria’s import-dependent economy.”
Looking ahead, PwC maintained a cautiously optimistic outlook for Nigeria’s domestic economy, projecting expansion in the near term. This outlook is based on fiscal reforms, infrastructural development initiatives, efforts to deepen financial markets through foreign currency-denominated debt instruments, positive expectations around crude oil prices, increased domestic oil production, and the commencement of operations at the Port Harcourt refinery.
PwC also noted that a tight monetary policy stance is expected to attract more capital inflows, thereby improving reserve accretion. Although inflation is expected to remain elevated, it is projected to begin moderating in the second half of the year due to tight monetary policy and base effects.
Meanwhile, the Chartered Institute of Directors (CIoD) has raised concerns over the increasing exodus of multinational companies from Nigeria, attributing this trend to forex issues, inadequate power supply, and inconsistent government policies. In its ‘Position Paper on the Exodus of Multinationals from Nigeria,’ signed by its Director General/Chief Executive Officer, Bamidele Alimi, CIoD recommended measures for the government to reverse this trend.
Regarding forex, CIoD stated, “Improving foreign exchange policies is another key intervention. The CBN should adopt more flexible foreign exchange policies to ensure businesses can access foreign currency more easily. This could involve creating a more transparent and market-driven exchange rate system.”
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