Analysts explain when, why CBN could devalue naira by 5-10%

The Central Bank of Nigeria (CBN) could devalue the Naira between 5-10% in 2020, according to analysts at EFG Hermes. Nigeria’s exchange rate between the naira and the United States dollar has remained flat at about N360-N363 at the Investor and Exporter window following staunch defense by the apex bank.

While querying whether the CBN was cooking a mini devaluation, analysts at EFG Hermes posited that the apex bank could devalue the naira between 5-10% in 2020. This was contained in a research report seen by Nairametrics.

The research report focused on some of CBN’s recent policies, especially its decision to stop OMO sales to local investors as well as its imposition of loan to deposit ratio of 65% on Nigerian Banks. The report suggests these policies are piling pressure on Nigeria’s external reserves, which dropped to a 2 year low of $38 billion at the end of 2019.

[READ MORE: CBN may announce new recapitalisation plan soon)

“When connecting the dots and considering this seeming shift in the CBN’s policy priorities, one can only start to ask whether the CBN is indeed willing to rock the Naira’s boat slightly in order to keep it sailing; i.e. push for some currency weakness to get growth going; we reckon a 5-10% move in 2H20 in case it happens,” it stated.

The report, however, doubts if the CBN will devalue the naira without being pressured to do so. “While this line of analysis clearly points to Naira weakness sooner rather than later if these policies are sustained, one wonders whether the CBN is really willing to push for a self-driven devaluation that it can avoid, for now, considering the Bank has defended the currency for years and still has enough reserves to shore it up.

“A self-driven devaluation would be clearly a precedent in Frontier markets, as usually central banks are forced to devalue rather than seek it.” 

But what if it devalues? The report opines that if it does, this will bode well for the economy providing room for it to grow. The report, however, does not specify how.

[READ MORE: CBN may announce new recapitalisation plan soon)

This scenario could create some short-term uncertainty but is a positive one in the
medium and long terms as it finally provides room for the economy to grow (although we argue that a devaluation alone is not sufficient to turnaround Nigeria’s economy fortune).”

It indicates further that the CBN might follow the familiar route of not devaluing but could decide to do and u-turn by reversing its existing monetary policies.

“The second scenario would be what we know best about the CBN: it acts at the 11th hour and pulls back the liquidity breaks by re-tightening monetary policy to maintain FX stability.”

Note: An earlier version of this article wrongly spelled the analysts as “EGM Hermes” instead of “EFG Hermes”. This has now been corrected.