By John Ikani
Nigeria’s local currency – naira – is set to weaken further next year as its current exchange rate to the dollar is well above fair value, according to Bank of America.
This was made known by BofA economist, Tatonga Rusike, in a note to clients seen by Bloomberg.
“As you may know, the Central Bank of Nigeria’s (CBN) foreign exchange strategy has resulted in a significant premium between official and parallel market rates. As a result, the apex bank’s major move next year may be a devaluation to bridge the deficit,” Rusike explained.
Basing his forecast on three indicators, Rusike said – the widely-used black-market rate, the central bank’s real effective exchange rate, and “our own currency fair value analysis” – show that the naira is 20 per cent overvalued.
“We see scope for it to weaken by an equivalent amount over the next six-nine months, taking it to as high as N520 per USD,” Rusike said.
While the naira will come under increasing pressure “due to limited government external borrowing,” devaluation is unlikely to happen until after the February 2023 presidential elections, the bank said.
What you should know
Nigeria operates a multiple exchange regime dominated by a tightly controlled official exchange rate and a parallel market where the currency is freely traded.
The naira exchanged at 440.95 to the dollar in the official spot while parallel rate went up to N740, according to the bureau de change operators.
The official rate has depreciated by less than 10 per cent since December 2021 even as the parallel rate is down by nearly a third within the same period, widening the gap to almost 70 per cent, BofA analysis show.
Nigeria’s foreign reserves have been declining due to the CBN’s ongoing intervention in the official market trying to maintain the stability of the local currency.
The Association of Bureau De Change Operators of Nigeria (ABCON) had earlier blamed the apex bank for the significant difference between official and secondary market rates.
According to ABCON, the naira has lost significant value against the dollar since the CBN stopped selling currency to Bureau De Change (BDCs) operators in July 2021.
“The greater the disparity with the official market, the higher the likelihood of increasing excess demand for foreign currency on the parallel market,” the BofA said.
