Nigeria will likely devalue its local currency by about 15% after President-elect, Bola Tinubu, is sworn in on May 29 to alleviate severe trade imbalances and dollar shortages, an analyst at Absa Group Ltd. said.
Africa’s largest economy operates a multiple exchange regime dominated by a tightly controlled official rate, cutting off access to many businesses and individuals, which in turn drives demand to the unauthorized black market.
In his election manifesto, the 71-year-old Tinubu pledged to “carefully review and better optimise” the naira system — a central bank policy he has described as “somewhat arbitrary.”
The Central Bank of Nigeria has kept the naira around 460 per dollar since the start of the year to try to contain inflationary pressures, Nikolaus Geromont, a fixed-income and currency analyst at Johannesburg-based Absa said in a research note. That’s led the spread between the managed and parallel markets to widen significantly. The difference is almost 60%.
“This discrepancy between the official and parallel markets is among the widest since the managed floating rate was introduced in 2016,” Geromont said. With “Tinubu calling for more flexibility in the exchange rate regime, we expect the naira to be upwardly adjusted to 530/USD after the presidential inauguration.”
Naira forward contracts are priced in depreciation of about 21 percent over the next three months. In a survey conducted by Bloomberg last year, investors and analysts also predicted the central bank would devalue the naira after a new president was elected.
A currency devaluation should help ease the severe imbalances currently found in the foreign exchange and trade markets, Geromont said.
Other factors Geromont sees supporting a devaluation include expectations that inflation may peak in the coming months, easing pressure on the central bank to keep the exchange rate artificially low for the sake of price stability and dwindling international reserves that may face further pressure from growing debt servicing costs and weaker oil prices. Nigeria’s reserves have declined to an almost two-year low of $35 billion.
The central bank has historically maintained hard-currency reserves at around $40 billion, Geromont said. “As they drop closer toward the $30 billion mark, the bank tends to upwardly revise the exchange rate, as was done in August 2017, March 2020 and February 2021.”
Following President-elect Bola Tinubu’s inauguration on May 29, Nigeria is likely to devalue its national currency by around 15 percent to mitigate serious trade imbalances and a shortage of dollars, said an analyst at Absa Group Ltd.
Africa’s largest economy has a multi-currency system dominated by a tightly controlled official exchange rate that blocks access for many businesses and individuals, fueling black market demand.
In his election manifesto, Tinubu, 71, promised to “carefully review and further optimize” the naira system – a central bank policy he described as “rather arbitrary”.
Nigeria’s central bank has kept the naira at around 460 per dollar this year in a bid to contain inflationary pressures, Nicolaus Geromont, Johannesburg-based bond and currency analyst at Absa, said in a research note. This causes the spread between the managed market and the parallel market to widen significantly. The difference is almost 60%.
“The discrepancy between the legal and parallel markets is among the largest since the managed variable tariffs were introduced in 2016,” said Geromont. As “Tinubu calls for more flexibility in the exchange rate regime, we expect the naira to rise to 530/USD after the presidential inauguration.”
The naira futures contract is expected to lose about 21 percent in value over the next three months. Also, in a Bloomberg poll last year, investors and analysts predicted that the central bank would devalue the naira after a new presidential election.
The devaluation of the currency will help relieve the serious imbalances that currently exist in the foreign exchange and trade markets, said Geromon.
Among other factors supporting the depreciation, Geromont sees expectations that inflation could peak in the coming months, easing pressure on central banks to keep exchange rates artificially low in the name of price stability, and dwindling international reserves, which could face additional pressure. from rising debt, service fees, and weaker oil prices. Nigeria’s reserves have fallen to their lowest level in almost two years at US$35 billion.
Central banks have historically maintained hard currency reserves of around $40 billion, said Geromon. “When approaching $30 billion, banks tend to revise exchange rates upwards, as happened in August 2017, March 2020 and February 2021.”