By Ruth Olurounbi
13.2% inflation and current account deficit of 3.9% of GDP
Nigeria’s currency is in the grip of tough external pressure, with internal foreign exchange shortages, and black market rates that have hit 475 naira to the dollar.
Nigeria’s current foreign exchange pressure that is likely to gain momentum in 2021 as the economy and imports recover will trigger a future adjustment of the nation’s currency to N430/$ next year, Bank of Africa analysts Rukayat Yusuf and Andrew MacFarlane said in its the global bank’s latest report looking at Nigeria’s FX unification and shortages.
“We estimate NGN fair value at 451/$, implying 15% overvaluation from current levels. Our baseline is for a 3.5% recession, 13.2% inflation and current account deficit of 3.9% of GDP this year. CBN to remain on hold with a 6% deficit covered by foreign loans and domestic issuance,” the duo said in the report.
Back in March, analyst Aly-Khan Satchu had argued, “The naira is gone. It’s just a question of when”.
The bank revised its previous naira/dollar forecast to 390/$1 by year-end from 430/$1 with foreign reserves at $28bn from $22bn on higher oil prices, lower imports and its expectations of a $1.5bn of World Bank loans expected to arrive Nigeria in October.
“FX shortages persist despite recent rate convergence”
The Central Bank of Nigeria (CBN) this month weakened the naira by more than 5% in response to mounting pressure from external lenders, a slump in oil prices that tanked the country’s budget as well as dollar shortages.
The CBN devalued its official exchange rate from N360/$1 to N379/$1, in what the Governor Godwin Emefiele said is close the gap with unofficial rates in the country.
The July devaluation followed a March cut in the value of the country’s naira triggered by the height of global market volatility, when the price of oil, Nigeria’s key export, collapsed. The country’s official exchange rate was devalued from N307/$1 to N360/$1 at the time.
Despite the unification move by the apex bank, the naira trades at over 470 to the dollar on the black market, prompting analysts to see the value of the naira sliding further.
Goldman Sachs analysts earlier in the month said they see the naira dipping to 500 to the dollar in a “reasonable target” of a year on “high and sticky” inflation in the country, as well as persistent outflows from official reserves.
“In response to the COVID-19 and oil shocks, the Central Bank of Nigeria (CBN) further adjusted the official exchange rate from N360 to N380/$ on August 6th. NGN rates have therefore converged around the N380-390/$ range (Chart of the Day) but dollar shortages in the formal interbank market and broader economy persist.
In particular, the CBN continues to impose import restrictions, border closures and bans on offshore trading which have pushed demand to the parallel market with rates as high as N475/$,” analysts at Bank of America said.
The deepening gap between official and informal naira rates is seen by analysts as a sign of decreasing shortages of foreign exchange, something the CBN is trying to curb with multiple policies targeted at stopping the bleed.
This includes what analysts see as the CBN attempting to fix a parallel market rate for the US dollars following a circular mandating the BDCs to sell to end-users at “no more than N386/$1” after it bank announced plans to resume dollar sales to Bureau De Change (BDC) operators from August 31 to September 4, 2020.
The bank said it will resume sales of dollars at $10,000 twice weekly to BDCs on September 7, following the initial one-week sales of August 31-Sept 2 as “part of efforts to enhance accessibility of foreign exchange particularly to travelers following the announcement of the limited resumption of international flights,” according to CBN Director, Trade and Exchange Department, O.S Nnaji.
In March this year, the CBN halted the sale of dollars to BDCs in the country, after stopping sales of dollars to the Nigerian National Petroleum Commission (NNPC) by oil companies, including International Oil Companies (IOCs) that operate within the country. The bank explained that the move to stop the sale of dollars was in accordance with its commitment to improving foreign exchange supply on the economy as the impact of the coronavirus pandemic hit the economy harder.
Deposit money banks including Guaranty Trust Bank Plc recently cut the amount of foreign currency customers can spend on international purchase from their naira mastercard to $100 a month from $3,000, with many banks now toeing the similar path to 2016 when Nigeria went into its first recession in 25 years.
President Muhammadu Buhari was head of state at that time, too.
With the CPI inflation accelerating to 12.8% YoY in July from 11.2% in 2019, reaching the highest level in more than two years on higher food prices from the ongoing closure of land borders, weaker naira and COVID-19 supply disruptions the Bank of America expects the CBN to “remain on hold at 12.5% for the remainder of the year, balancing weak economic activity with FX and inflation.”