The fluctuations in Nigeria’s inflation rate, which hit 33.88% in October after briefly dropping to 32.70% in September, reflect ongoing economic instability. For Nigerians, high inflation erodes purchasing power, making everyday essentials like food and transportation more expensive. This creates a cost-of-living crisis, especially for low-income families, and increases uncertainty about the future.

For the markets, persistent high inflation creates volatility that can deter investment. In response, the Central Bank of Nigeria (CBN) may raise interest rates, which increases borrowing costs for businesses and consumers, potentially slowing economic activity. Additionally, inflation puts pressure on the Naira, raising the cost of imports and further fueling price hikes.

Fiscal and monetary authorities are faced with the challenge of balancing policies to control inflation without stalling economic growth. Moreso, the volatility in inflation rates highlights the challenge in stabilising the economy and restoring confidence, making it crucial to address these issues effectively.

Moving on, the rise in foreign reserves is crucial for several reasons. Generally, the increase in reserves signals to both local and international investors that Nigeria is improving its economic fundamentals. This can lead to increased foreign direct investment (FDI), which is essential for long-term economic growth. Moreso, higher reserves improve Nigeria’s creditworthiness, potentially lowering borrowing costs both domestically and internationally. This can facilitate financing for infrastructure projects and other critical needs without exacerbating debt levels. Improved foreign reserves can be significant as it might help control inflation, leading to more stable prices for goods and services, in the long term.

With boosted foreign reserves, CBN can enhance liquidity in the domestic market. This is particularly important given the ongoing pressures on the Naira, which have been exacerbated by high demand for foreign currency amid limited supply. Increased liquidity can help stabilise exchange rates and reduce volatility, which is beneficial for businesses and consumers alike.

The involvement of offshore investors in FX swaps can further lead to increased competition in the currency market. This can help narrow spreads between official and parallel market rates, contributing to a more efficient pricing mechanism for foreign exchange.

Direct sales can be used as a tool to manage exchange rates more effectively. By controlling the flow of foreign currency into the market, the CBN can influence supply and demand dynamics, which are critical for stabilizing the Naira.

Nonetheless, there are risks associated with this approach; if not managed carefully, selling FX directly could lead to over-reliance on external funding sources and might create vulnerabilities if global market conditions change unfavourably. Additionally, it could invite speculative activities that might undermine efforts to stabilise the Naira.

As the November FGN Bonds auction takes place today, with an offer of ₦60 billion each for April 2029 and February 2031, it seems to be a strategic development in the Nigerian debt market. Given the original range of offer of ₦80 – ₦100 each and the previous auction results, where the April 2029 bond closed at a stop rate of 20.75% and the February 2031 bond at 21.74%, there are several factors to consider regarding where these bonds might close in the current auction.

Considering the prevailing economic conditions, including inflation rates and investor sentiment, it is likely that the stop rates for both bonds could remain elevated. The recent trends in yields suggest that investors are demanding higher returns due to inflationary pressures and uncertainties in the economic environment. Therefore, it is plausible to expect that the April 2029 bond may close around 20.5% to 21.0%, while the February 2031 bond could close between 21.5% and 22.0%. This projection aligns with the need for competitive yields to attract both local and foreign investors.

In other news, the planned issuance of a $1.7 billion Eurobond by Nigeria to finance shortfalls in the 2024 budget comes with mixed reactions, even though it is a move to address ongoing fiscal challenges. This decision reflects the country’s reliance on external borrowing to manage budget deficits, primarily due to constrained domestic revenue generation and persistent economic pressures, particularly in the oil sector.

While the Eurobond will provide immediate financial relief, it also contributes to Nigeria’s growing debt burden and highlights the need for sustainable financial management practices to ensure long-term economic stability and growth.

In a different development, the Federal Executive Council’s approval of a ₦47.9 trillion budget for the 2025 fiscal year is, at face value, a huge leap compared to Nigeria’s previous budget sizes (with the most recent ₦28.7 trillion from the 2024 budget). Further, it indicates a probable expectation of increased spending on infrastructure, social services, and other critical areas. If effectively implemented, the budget could drive economic growth and improve living standards by investing in key sectors. However, successful execution will depend on efficient allocation of resources and combating corruption as increased government spending could lead to inflation if not matched by corresponding revenue increases or if it leads to excessive money supply growth.

However, whether this budget is realistic depends on the government’s ability to generate revenue, manage inflation, and control fiscal deficits. No doubt, this budget will likely require substantial financing through both domestic and international markets, raising questions about how effectively the government can mobilise resources without further intensifying debt levels. The scale of the proposed budget also raises concerns about the sources of funding and whether the revenue projections are attainable, particularly given the difficulties Nigeria faces with tax collection, underperforming oil revenue, and rising debt levels.

There is a growing school of thought that opines that higher interest rates will not address the inflationary trend, it may in fact further fuel it. There is also a consensus view that attempts to intervene in the FX market may be tantamount to suppressing the real market exchange rate value. Propounders of the view adduce that any effort to suppress the rates will be followed by stronger recalls.