Central Bank of Nigeria (CBN) is unlikely to devalue the naira, despite rising demand for the dollar at both official and parallel markets.
A report by Augusto & Co., titled: “2022: The Story So Far & What Lies Ahead,” said the naira, which started this year at N567/$ at the parallel market, now exchanges at N707/$. It is N416.37/$ at the official market.
The report added that the declining value of the local currency “has pushed up the exchange rate premium between the official and parallel markets to N290.63/$.”
The last devaluation of the naira was in May 2021, when the CBN adopted the Nigerian Autonomous Foreign Exchange Rate (NAFEX), also known as the Investor and Exporter (I&E) forex window rate, as its official exchange rate to the dollar.
“We do not expect the CBN to officially devalue the exchange rate despite sustained pressure. At the official market, we expect the naira to hover between N419/$ and N425/$ through the end of 2022,” the report said.
The Agusto & Co. report noted that long-term inflation is one of the exchange rate stoking factors, adding that the differential between two countries’ long-term inflation rates would be mirrored in the exchange rate depreciation between both nations.
In other words, the long-term rate of inflation of the naira compared to that of the US dollar plays a significant role in what the value of the naira would be relative to the dollar.
“Since the Naira has a higher long-term rate of inflation (12 per cent) compared to the US Dollar (two per cent), it is a weaker currency and will depreciate by approximately 10 per cent,” it said.
The report enumerated three major mechanisms for exchange rate determination, namely, pegged exchange rate system, floating currency, and a crawling peg.
It explained that although each of the options has its own shortcomings, a crawling peg option is more suitable for Nigeria.
This, the report said, allows the CBN to intervene in the market when rates are significantly higher or lower than its target.
An Economist and Managing Director, Financial Derivatives Company Limited, Bismarck Rewane, said the naira surprised speculators and market watchers by appreciating by 1.5 per cent from N718/$ to N707/$ on Friday.
“Most analysts were fearing that an N1000/$ was within shouting distance. As unpalatable as N707/$ may sound, some Nigerians are breathing a sigh of relief. The reason for this respite is mainly because of a naira crunch,” he explained.
He said there is temporary resistance at N718/$ and a market correction which means the naira may appreciate N695/$ before falling again.
“These are technical movements which do not address the fundamental weaknesses in the Nigerian forex market and the short supply of dollars from the CBN and exporters. That means, there is a limit to how much naira is available in the system,” Rewane said.