Nairametrics| The announcement last week of a new forex policy by the Central Bank of Nigeria (CBN), coupled with the injection of over $600 million during the week,has crashed parallel market rates from as high as N525 to about N450.
We reported last week that the CBN plans to narrow this margin to as low ad 10% and could pave the way for a float. This narrative seems to be gaining traction with some analysts and surprisingly they now opined that the Naira is valued below N400.
For example in a report released by Renaissance Capital (Rencap) Limited, it reasoned that despite the current combination of crude oil price increase, improved crude oil production and the new forex policy stimulating the country’s external reserves to new highs and reducing the gap between official rates and parallel market rates, a full float would earn the country much-needed FDI.
“We think N450-500/$ would attract investors even without $20 billion of cheap International Monetary Fund (IMF)-led financing. One of our Real Effective Exchange Rate (REER) models – the 22-year model which corresponds to a period when oil averaged $55/bl – implies fair value for the naira at N370/$, which via inflation should become N400/$ by end-2017.”
“At the parallel rate of NGN500/$, Nigeria has the cheapest currency in Africa, and even at NGN450/$ it would still rival Egypt at EGP15.8/$1 (the third cheapest in Africa). Given this, a full float of the currency would likely attract billions of dollars to Nigeria, similar to how Egypt has attracted $9 billion since its float in November.
“The vast majority of Nigerian and foreign potential investors ignored Nigeria in 2016 due to exchange rate difficulties, but rising oil prices and production (double the 0.9mbpd 2016 lows) suggest some opportunities may emerge in 2017.”
It remains to be seen if the CBN is using the new forex policy as a means of gearing up for an actual full float of the Naira or if this is just another case of temporary CBN intervention. Whichever it is though, what most analysts agree on is that the reduced gap between the official and parallel market rates bodes well for the Nigerian economy.
Barring international politics, naira should not have been adversely devalued the way it is now! Barely two decades ago, the naira was at par with the dollar! I agree there are issues which bordered on the relegation of the naira to the extent that its value is the second lowest in Africa! Of course, political issues play marginal role in ruining the position of naira, but nevertheless, Nigerians love for foreign commodities have played a major role toward destroying the currency. Lack of interest by individuals and corporate interests have played prominent role in ruining the economy! Corruption, nepotism and tribalism have their own roles in destroying the economy. First and foremost, Nigerians must learn to respect what they have in form of resources, Develop these resources maximally and promote it effectively. Your interest in promoting foreign goods over and above your own will ultimately lead to disaster to your own economy. Let us harness what we have and project it to the outside world as the best we have and the world at large will accept it. A practical example is our refineries which have been underutilized for years. These refineries, if properly managed, should make available to the nation, finished crude oil instead of importing them from the advanced countries. As a matter fact, the foreign exchange to be realised from the import should be phenomenal. Let us appreciate what is ours; develop it, and market it to the outside world. The assurance of enhancing our forex is guaranteed. Let the Central Bank of Nigeria stands to its responsibility by making adequate announcements to the public, with particular reference to the commercial banks. Intermittent announcements may confused the financial institutions by misinterpreting the good intentions of the Central Bank Conclusively, all hands must be on the deck in order to enhance the exchange rate disparity between the U.S. dollar and the naira. The government alone can not do it, Both the private and public sectors must work hand in hand together in order to bring restitution to the economy.