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Nigeria’s central bank may devalue naira by 10% this year~Survey

By on January 28, 2021 0 110 Views

The Central Bank of Nigeria (CBN) will probably devalue the naira by as much as 10 percent this year amid a lingering dollar shortage in Africa’s top oil producer, according to a Bloomberg survey of investors and analysts.

Of the 17 survey participants, eight forecast a devaluation of between 5 percent and 10 percent this year.

Five saw a devaluation of more than 10 percent and the remaining four predicted a markdown of as much as 5 percent.

The median of analysts’ estimates project the naira at N426.5 per dollar by the end of 2021, from around N393 on Wednesday.

A dollar squeeze continues to weigh on the naira even after the CBN was forced to weaken its official rate twice last year after a sharp drop in the price of oil, the country’s main export and source of greenbacks.

Devaluation Ahead

A recovery in crude prices to pre-pandemic levels could help the central bank keep its grip on the currency, but not for too long.

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“If you don’t have sufficient dollars, the idea that you’re controlling the naira is a fiction,” said Andrew Nevin, a partner and chief economist for Nigeria at PricewaterhouseCoopers LLP.

“It is impossible to get sufficient investment for the economy to grow above 6 percent without a unified exchange rate.”

Sunk in recession and starved for cash, the government of President Muhammadu Buhari, who has promised 10 percent annual growth, agreed to merge the country’s multiple exchange rates and allow the naira to float more freely.

The World Bank is withholding a $1.5 billion loan until the government moves ahead with currency reforms to attract investment.

Under the lead of central bank governor Godwin Emefiele, the government has tried to preserve dollars by restricting importers’ access to hard currency, limiting dollar sales and reducing international spending.

Emefiele on Tuesday reiterated threats to ban exporters who fail to repatriate foreign exchange proceeds from using banking services.

Still, there are signs the central bank is allowing for an additional depreciation of the exchange rate for investors and exporters, known as Nafex, toward 400 per dollar, said David Cowan, the London-based Africa economist at Citigroup Inc.

“Once this important psychological barrier is breached, it may allow it to slip more significantly in early 2021,” Cowan said.

The naira weakened 1 percent on the spot market to N393.95 on Thursday, while it traded at N473 on the parallel market, according to abokifx.com, which tracks street prices.

Nigeria has one of the widest spreads between 12-month currency forwards and one-month contracts among its peers on the continent, suggesting traders expect a large depreciation.

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