Fitch Says Naira Scarcity Will Affect Dollar Demand, Exchange Rate

Global credit ratings agency, Fitch Ratings, has warned that Nigeria’s exchange rate might appreciate due to scarcity of Naira notes.

Fitch made this known in a report dated 14 February 2023 and titled ‘Nigeria’s Economic Challenges Highlight Importance of Post-Election Policies’.

The credit ratings firm revealed that the Naira scarcity will cause a surge in demand for foreign currencies like the Dollar, and this will weaken the Naira in the foreign exchange market. 

“The Nigerian Supreme Court’s suspension of a 10 February deadline for exchanging old banknotes into new eases, at least temporarily, the risk of intensifying cash shortages. 

“However, the demonetisation drive is still likely to be disruptive in the near term. Associated cash shortages may hit consumer spending and boost demand for foreign currency, aggravating foreign-exchange shortages,” the report reads. 

Fitch also stated that despite the obvious negative impact the Naira scarcity will have on the country’s currency value, it is unclear if the Naira redesign policy by the Central Bank of Nigeria (CBN) will have a long-term positive effect. 

“It is not yet clear whether there will be offsetting longer-term economic benefits, such as greater use of the formal banking system or enhanced use of digital payment systems,” Fitch said. 

Prime Business Africa previously reported that the Naira redesign policy of the CBN has resulted in the scarcity of N200, N500 and N1,000 notes. 

The Godwin Emefiele-led central bank redesigned the Naira notes to mop up over N2.7 trillion cash in circulation outside the banking system, but stated it will not produce the exact volume and also gave a short cash swap timeframe of two months. 

This resulted in the scarcity of Naira notes, and Nigerians have been reacting against the decision, with 17 bank branches and employees attacked. 

Fitch further stated: “In November, Fitch said that significant intensification of Nigeria’s external liquidity pressures, illustrated by a rapid decline in international reserves, could lead to negative rating action. 

“Our base case assumes that international reserves will edge down further and that foreign-exchange liquidity will remain constrained. We assume that the official exchange rate will be permitted to depreciate modestly over 2023-2024, but that it will remain overvalued, hampering economic activity.”