Economists Predict Naira Appreciation Could Lead to Price Reductions and Lower Inflation

As the Naira strengthens, economists foresee potential price reductions and a decline in inflation, signaling improved economic stability for Nigeria.

Nigerian economists are hopeful that the Naira’s continued appreciation against the dollar could significantly decrease the prices of imported goods, consequently reducing the country’s headline inflation rate, which was at 33.88 percent in October 2024.

The CEO of SD & D Capital Management, Gbolade Idakolo, and Professor Godwin Oyedokun from Lead City University in Ibadan revealed this during separate interviews with D on Monday.

Idakolo and Oyedokun discussed the Naira’s valuation as it reached N1,538.50 per dollar on Monday, December 9, 2024, having previously been at N1,740 on November 9 of that year.

Compared to the exchange rate of N1,740 on November 9, 2024, the Naira appreciated by N201.5 in the official market and by N110 in the black market on a monthly basis.

This remains true even though the Naira slightly depreciated by N3.5 and N30 against the dollar at both FX markets to start the week on Monday.

This came after the Central Bank of Nigeria recently introduced the Electronic Foreign Exchange Matching System (EFEMS) to remove distortions and enhance transparency in the foreign exchange market.

In the meantime, this isn’t the first instance of the Naira appreciating following CBN’s policy interventions.

Nonetheless, the strengthening of the Naira has consistently been brief and impermanent.

According to the DAILY POST, this development has affected the foreign exchange rate applied for import duties and cargo clearance, which stood at N1645 per dollar as of Tuesday last week.

In response, Idakolo mentioned that with effective oversight by the CBN, the EFEMS platform is a transformative development for the nation’s foreign exchange market.

He stated that EFEMS had instilled fear in the parallel market ecosystem, curbing unnecessary speculation and thus negatively affecting the Naira’s strength.

He pointed out that as the Naira strengthens, the exchange rate for import duties is expected to decrease, which will subsequently affect the prices of imported goods.

The recently launched EFEMS platform by CBN, which centralizes forex bidding, is a game changer due to its transparency and the consolidation of all previous bidding options into one system.

There is currently no opportunity for manipulations, as all quotes are transparently displayed on the platform for both buyers and sellers.

This has instilled fear in the unofficial forex market (black market) and curbed excessive speculations, which have adversely affected the strength of the Naira.

The Central Bank of Nigeria should keep overseeing the market while meeting its regulatory responsibilities to all stakeholders.

The BDCs need to comply with the CBN’s reporting standards, and banks should impose strict penalties on those who violate these regulations.

The recent decrease in the exchange rate for import duties is a positive development, as it will likely lower clearing costs and subsequently affect the prices of imported goods.

He explained that clearing charges significantly affect the cost of imported goods, and with a reduction in these charges, prices will be adjusted correspondingly.

Oyedokun attributed the recent appreciation to interventions by the CBN, higher foreign exchange inflows, and decreased demand for dollars.

Similar to Idakolo, Oyedokun noted that the appreciation of the Naira against the dollar might indirectly influence the prices of imported goods in Nigeria.

Although the recent decrease in import duties exchange rate might not directly influence the Naira’s exchange rate, it could indirectly affect the prices of imported goods in Nigeria.

“If importers are able to obtain goods at a more favorable exchange rate, they might transfer these savings to consumers, resulting in reduced prices for imported products,” he explained.

He did note, however, that several factors could lessen the impact of the exchange rate drop on imported goods’ prices.

Disruptions in the global supply chain could undermine any advantages gained from a lower exchange rate.

“Internal economic factors like inflation, interest rates, and government policies can impact the prices of imported goods.”

He further explained, “Importers might choose to increase their profit margins instead of passing the savings on to consumers.”

According to Oyedokun, in order to sustain the Naira’s appreciation, the CBN must persist in its efforts to uphold macroeconomic stability, attract foreign investment, and tackle structural issues.

He noted that in order to sustain the Naira’s appreciation, the CBN must persist in its efforts to maintain macroeconomic stability, attract foreign investment, and encourage exports.

Furthermore, it will be essential to tackle structural challenges like corruption, insecurity, and insufficient infrastructure.

It’s crucial to recognize that various factors influence the exchange rate, so the Naira’s appreciation might be temporary.

He stated that ongoing monitoring and strategic actions by the CBN will be essential to maintain the sustainable strength of the Naira.