According to Bloomberg, Bank of America’s (BoA) economist said in a note that based on three indicators- the widely used black-market rate, the central bank’s real effective exchange rate, and the bank’s own currency fair value analysis, the Naira is 20% overvalued, noting that there is scope for the Naira to weaken over the next six-nine months, taking it to as high as N520/US$. According to the bank, while the Naira will come under increasing pressure due to limited government external borrowings, devaluation is unlikely to happen until after the February 2023 presidential elections. 

The Naira has fallen to low levels in the past weeks, amidst the ongoing dollar scarcity. Nigeria is experiencing one of its worst FX crises in history due to increasing demand for FX amidst low supply. Fundamental market pressures are clearly turning depreciatory and are likely to remain so over the remainder of the year amid declining investment inflows and fiscal expansion. However, the rate is clearly being heavily managed by the CBN. As such, the rate for the rest of the year depends more on the CBN’s willingness and ability to maintain it at its current level than on fundamental or valuation pressures. 

From a willingness perspective, we believe that the CBN has always been and is very keen to prevent further devaluation especially not during the run up to the elections, when devaluation of the currency will be an unpopular decision. As for the CBN’s ability to maintain the rate at its current level, we note that despite the high oil price, occasioned by the Russia-Ukraine war, Nigeria has failed to benefit from it due to limited production and the maintenance of a subsidy regime, which is estimated to cost the country at least N4trn this year. High oil prices imply increased cost of refined products and Nigeria continues to spend a huge part of its FX earnings on the importation of Petroleum Motor Spirit (PMS) and other refined products due to the complete absence of local refining capacity. The country has also failed to significantly increase its non-oil exports. Crude oil with decreasing production capacity continues to dominate the export earnings. Understandably, the reserves are being pressured. These, coupled with the almost non-existent FPI inflows, which was a major source of dollars for the economy previously, makes the situation dire. The high number of people relocating to the UK and Canada taking advantage of current visa laws has increased the demand for Invincibles in the form of school fees and upkeep. The only respite are remittances. 

The CBN has been gradually allowing a devaluation of the Naira at all the available windows. At the I&E window, technically the CBN has allowed funds to be supplied at about N432/US$ and N436/US$. Recall that previously, CBN capped sales at the I&E window at about N420/US$. Sale of FX for Invisibles and to SMEs, which has been around N420/US$ is now at N435.98/US$. Looking ahead, it is looking very likely that the CBN will allow the rate at the I&E window to depreciate towards our initial NGN455.00/US$ target for the end of the year and BoA’s post-election forecast of N520/US$ may not be farfetched