According to Bank of America (BoA), the naira, Nigeria’s currency, is now considered undervalued against the US dollar following the government’s recent foreign exchange reform.
BoA predicts that the value of the naira will settle at N680 to the dollar by the end of the year. The bank’s analysts project a year-end trading range of 650-680, with the potential for it to trade above 700 before returning to the expected range in early 2024.
BoA believes that the transition period, which involves aligning rates and increasing US dollars in the formal market, will take time. However, they anticipate the naira’s value to strengthen and appreciate once the dust settles.
The bank also notes that Nigeria can achieve consistent current account surpluses in the medium term through higher oil exports, with an estimated $12 billion increase, and a liberalized import regime, resulting in a $10 billion increase in non-oil imports.
Furthermore, Bank of America suggests that President Bola Ahmed Tinubu’s next priority should be curbing oil theft, which has plagued the nation. They propose implementing security sector reforms and involving host communities near pipelines to achieve this goal.
Successful measures in reducing oil theft could potentially boost Nigeria’s crude oil production to 1.6 million barrels per day (bpd) within 12 to 18 months, surpassing the current production level of 1.2 million bpd, unless OPEC limits are in place.
Bank of America is optimistic that Nigeria could feasibly increase crude oil production to 1.6 million bpd within the next 12 months, and when considering condensates, total oil production could reach 1.8 million bpd within two years.
This would mark a structural improvement from the pre-pandemic level of 1.4 million bpd. As Nigeria heavily relies on hydrocarbons, which account for 90% of exports, at least half of fiscal revenues, and about 6% of GDP, higher oil revenues coupled with efforts to increase non-oil revenue would alleviate the burden of high debt service.
Bank of America’s analysis provides insights into the undervaluation of the naira, the potential for increased oil production, and the importance of diversifying Nigeria’s revenue sources beyond hydrocarbons.