Nigeria’s struggling economy may face more hurdles following tumbling oil prices, as the naira faces intense pressure amidst inflation and the outcome of the United States election.
With the global markets already bracing for a week of crucial economic data, Nigeria, Africa’s largest oil producer, is under intense economic pressure, especially with the current surging inflation that could deepen fiscal stress in the coming months.
Assessing the situation, a senior market analyst at FXTM, Lukman Otunuga, noted that the country’s consumer price index (CPI) for October is expected to increase to 33.4 per cent year-over-year, up from September’s 32.7 per cent, adding that the move could be attributed to hikes and seasonal flooding in northern Nigeria, which has disrupted harvests and driven up food prices.
Noting that the Central Bank of Nigeria (CBN) has raised interest rates to 27.25 per cent in its fifth consecutive hike this year to curb inflation and stabilise the naira, Otunuga noted that CBN’s aggressive monetary stance reflects the government’s desperation to protect its currency and contain inflation.
Despite these efforts, he warned that inflation may not plateau until late 2024, particularly if energy prices rise and food supplies are constrained.
With oil price standing at around $71 per barrel yesterday and OPEC lowering demands, Otunuga said the development is compounding Nigeria’s inflationary crisis.
Nigeria, which depends on oil sales for a significant portion of its revenue, according to him could face severe financial strain if oil prices continue their downward slide.
China’s economic slowdown, coupled with rising U.S. oil production under the potential policies of a Trump presidency, could exert downward pressure on oil.
As oil prices have dropped 4 per cent since early 2024, he warned that Nigeria may see its revenues erode further, with impacts likely to cascade into currency stability, inflation control and investment inflows.
Otunuga believes that the U.S. Dollar Index (DXY) could see volatility this week as the DXY, which tracks the dollar against a basket of major global currencies, is expected to be influenced by the October U.S. CPI report set for release on November 13.
Should inflation in the U.S. show signs of cooling, there is a 65 per cent probability that the Federal Reserve may cut rates by 25 basis points before the end of 2024, he noted.
This outcome could soften the dollar, potentially providing some respite for the naira, the analyst said, while noting however that a higher-than-expected CPI reading might bolster the dollar, intensifying pressures on emerging market currencies like the naira.
